Question

The yield to maturity on 1-year zero-coupon bonds is currently 6.5%; the YTM on 2-year zeros is 7.5%. The Government of Canada plans to issue a 2-year maturity coupon bond, paying coupons once per year with a coupon rate of 8.5%. The face value of the bond is $100. a. At what price will the bond sell? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.) 6.25 points Price $ Skipped b. What will the yield to maturity on the bond be? (Do not round intermediate calculations. Round your answer to 3 decimal places. Omit the "%" sign in your response.) eBook Yield to maturity % Print References c. If the expectations theory of the yield curve is correct, what is the market expectation of the price that the bond will sell for next year? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.) Price $0 d. Recalculate your answer to (if you believe in the liquidity preference theory and you believe that the liquidity premium is 1%. (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.) Price

Answer 1

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@ v ' ** : ENG 02:49 29-03-2070 24 HZ466 fix Formula Bar HT HU HV HW HY 466 467 468 469 470 471 472 YEAR YTM 6.50% 7.50% 473 YEAR 474 COUPON + PRINCIPAL ZERO COUPON RATE 8.5 6.5000% 108.5 7.5000% PRESENT VALUE OF COUPON + PRINCIPAL 7.98 (8.5/(1+0.065)^1] 93.89 (108.5/(1+0.075)^2] 475 PRICE OF THE BOND = PRESENT VALUE 101.87 476 477 A 478 479 B 480 FV = COUPON RATE COUPON = PV = YEARS = 100 8.50% 8.5 101.87 481 482 483 484 485 YTM = 7.46% (=RATE(HW483,-HW481,HW482,-HW479)] 486 487 C 488 489 FORWARD RATE = 2f1= FORWARD RATE = 2f1= ((1+0.075)^2/(1+0.065) 1)- 1 8.51% YIELD SPOT AFN BANKING NOTE Sheet2 S1 S3 CLEAN PRICE $10 BIDDING, UNDERWRITING EUAC AW LIFE LP, IP, MRP, INFLATION WARR... +

W @ v ' ** : ENG 02:50 29-03-2070 24 fix HT HU HV HW HX HY HZ Formula Bar IM ma Bar B HZ486 1 486 487 C 488 489 490 491 492 FORWARD RATE = 2f1= FORWARD RATE = 2f1= ((1+0.075)^2/(1+0.065) 1)- 1 8.51% 8.51% AFTER A YEAR, YTM = YEARS TO MATURITY = PRICE AFTER A YEAR = 99.99 (=PV(HW490, HW491, HW481,-HW479)] 493 Elr2) = 2f1 - 1% = = 8.51% -1 7.51% 494 D 495 496 497 498 499 7.51% AFTER A YEAR, YTM = YEARS TO MATURITY = PRICE AFTER A YEAR = 100.92 (=PV(HW509,HW491,-HW481,-HW479)] 500 501 502 503 504 505 506 507 508 509 YIELD SPOT AFN BANKING NOTE Sheet2 51 53 CLEAN PRICE 510 BIDDING, UNDERWRITING EUAC AW LIFE LP, IP, MRP, INFLATION WARR... +