Question
The following are Indian government bond yields. Yield Dec/05/19 Yield Dec/05/20 Yield Dec/06/20 1year 0.1 0.09 0.10 2Year 0.31 0.56 0.60 3Year 0.67 1.13 1.20
The following are Indian government bond yields.
Yield Dec/05/19 Yield Dec/05/20 Yield Dec/06/20
1year 0.1 0.09 0.10
2Year 0.31 0.56 0.60
3Year 0.67 1.13 1.20
a) Under the Expectations Theory, calculate the expected (1-year) interest rates implied by the Dec/05/20 yield curve for next year and the year after that; i.e. find Liquidity Premium Incorporated uses the Liquidity Premium Theory. On 10/05/20 they forecasts that (1-year) interest rates are going to be higher over the next two years at .19%; i.e.
b) What risk premiums are they using?
c) Using the liquidity premiums you have calculated in part (b), update the nominal interest rate forecast for 2022 using the data from the next day (Dec/06/20).
d) Nowadays Europe are issuing 10-year bonds of negative yields. Why investors still buying them? Give two reasons. (The YTM on the bond is 3% and the coupon rate is 7% with annual coupons.)
e) What is its price if it is a 30-year bond and has a face value of 10,000?
f) What is the one-year Rate of Return (RET) on the bond if the yield to maturity rises to 5%?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started