Question

a. Assuming that the expectations hypothesis is valid, compute the price of the four-year bond shown below at the end of (i) the first year; (ii) the second year; (iii) the third year; (iv) the fourth year. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Beginning of Year Price of Bond Expected Price $ 970.90 $ 909.97 844.62 $ 776.26 b. What is the rate of return of the bond in years 1, 2, 3, and 4? Conclude that the expected return equals the forward rate for each year. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Beginning of Year Expected Rate of Return

Answer 1

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- 2x tw BOND - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Σ AutoSum : A Calibri -11AA = = = Dr Wrap Text General Ea Copy Fill 2 m Paste BI Format Painter U D- DA Merge & Center - $ % , Sort & :.: Find & Formatting as Table Styles 2 Clear Filter Select Clipboard Font Alignment E Number E Styles Cells Editing IN141 ID IE IF IG IH IM IN O P 123 PRICE 124 MATURITY OF BOND YTM FORWARD RATES 125 970.9 3.00% (1000/1F125)-1 3.00% 126 909.97 4.83% ((1000/1F126)^(1/2)) -1 6.70% ((1+1H126)^2/(1+1H125)^1)-1 127 844.62 5.79% ((1000/1F127)^(1/3) -1 7.74% ((1+1H127)^3/(1+1H126)^2)-1 128 776.26 6.54% ((1000/1F128)^(1/4)) -1 8.81% ((1+1H128)^4/(1+1H127)^3)-1 129 130 131 132 BEGI а EXPECTED PRICE EXPECTED RATE OF RETURN 133 OF YEAR 134 776.16 [=1000/(1.03* 1.067* 1.0774*1.0881)] 3.00% (16135/1G134) - 1 799.45 [=1000/(1.067* 1.0774*1.0881)] 6.70% (16136/1G135) - 1 136 853.01 [=1000/(1.0774*1.0881)] 7.74% (16137/1G136) - 1 919.03 [=1000/(1.0881)] 8.81% (1000/1G137) - 1 138 139 140 IF YOU SEE FORWARD RATES AND EXPECTED RATE OF RETURNS THEY TALLY 141 M YIELD SPOT Sheet2 AFN BANKING NOTE 51 53 CLEAN PRICE $10 BIDDING, UNDERWRITING EUAC AW LIFELP, IP, MRP, INFLATION WARRANT refund 54 55 56 0 Rea ferences | THE I7 130% 2. 9 * * 10 ENG 135 137 H 0 0 +) 27-11-2019