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Question 6 (10 marks) The table below contains prices, coupons and the time to maturity for three bonds as of today. The bonds pay coupons
Question 6 (10 marks) The table below contains prices, coupons and the time to maturity for three bonds as of today. The bonds pay coupons annually and have a face value of $100. Please use annual compounding in your calculations and three decimal places in your workings if not using Excel. Bond Years to Maturity Annual Coupon Price $98.585 A 1 4.5% B 2 7.0% $101.833 C 3 3.0% $91.981 a) What is the expected price of Bond B in one year's time under the expectations theory of the term structure? (6 marks) b) What would be the expected price of Bond B in one year's time under the liquidity premium theory with a constant 0.5% liquidity premium? (4 marks)
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