You are given the following information on zero coupon bonds: Term Zero coupon yield r(0,t) 2...
You are given the following information on zero coupon bonds:
|
Term |
Zero coupon yield r(0,t) |
|
2 |
3.00% |
|
4 |
6.00% |
- Calculate the implied 2-year forward rate two years from now [i.e. r(2,4)].
- Suppose that you can enter into a forward rate agreement for r(2,4) at a rate of 10%. Use a cash flow table to illustrate how you can take advantage of this arbitrage opportunity. HINT: you should have a riskless profit with no investment at the end of year 4.
Homework Answers
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You are given the following information on zero coupon
bonds:
Term
Zero coupon yield r(0,t)
2...
The yield to maturity (YTM) on 1-year zero-coupon bonds is 5% and the YTM on 2-year...
The yield to maturity (YTM) on 1-year zero-coupon bonds is 5% and the YTM on 2-year zeros is 6%. The yield to maturity on 2-year-maturity coupon bonds with coupon rate of 12% (paid annually) is 5.8%. What arbitrage opportunity is available for an investment banking firm? What is the profit on the activity?
The yield to maturity (YTM) on 1-year zero-coupon bonds is 4% and the YTM on 2-year...
The yield to maturity (YTM) on 1-year zero-coupon bonds is 4% and the YTM on 2-year zeros is 5%. The yield to maturity on 2-year-maturity coupon bonds with coupon rates of 9% (paid annually) is 4.5%. a. What arbitrage opportunity is available for an investment banking firm? and $ The arbitrage strategy is to buy zeros with face values of $ , and respective maturities of one year and two years. b. What is the profit on the activity? (Do...
Suppose that you observe the following prices of three zero-coupon bonds issued by the government: YTM...
Suppose that you observe the following prices of three zero-coupon bonds issued by the government: YTM (spot rate) Price 985.22 1-year zero-coupon bond X 2-year zero-coupon bond Y 3-year zero-coupon bond Z Face value 1,000 1,000 1,000 P2 4% 901.94 Questions: A. (4 pts) Draw a yield curve based on the above three zero-coupon bonds. Comment on the shape. B. (6 pts) Calculate the implied 1-year forward interest rate, two years from now (i.e. f2.a)
The yield to maturity (YTM) on 1-year zero-coupon bonds is 5% and the YTM on 2-year...
The yield to maturity (YTM) on 1-year zero-coupon bonds is 5% and the YTM on 2-year zeros is 6%. The yield to maturity on 2-year- maturity coupon bonds with coupon rates of 9% (paid annually) is 5.9%. a. What arbitrage opportunity is available for an investment banking firm? The arbitrage strategy is to buy zeros with face values of $ D and $C , and respective maturities of one year and two years. b. What is the profit on the...
Bond prices in the absence of arbitrage Consider a market with two risk-free zero-coupon bonds, A...
Bond prices in the absence of arbitrage Consider a market with two risk-free zero-coupon bonds, A and B. Their respective maturities are 1 and 2 years, and their market prices are 97.0874 and 95.1814 (expressed as percentage of the face value). (a) Calculate the discount rates rt for t = 1 and 2 years. (b) Suppose that a two-year bond C, with a coupon rate of 2.75%, also trades in the market. What should be its price if there is...
The current yield curve for default-free zero-coupon bonds is as follows: Maturity (Years) 10 YTM (%)...
The current yield curve for default-free zero-coupon bonds is as follows: Maturity (Years) 10 YTM (%) 10.5% 11.5 12.5 points a. What are the implied 1-year forward rates? (Do not round intermediate calculations. Round your answers to 2 decimal places.) eBook Forward Rate Maturity 2 years 3 years Print References b. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will be the yield to maturity on 1-year zero-coupon bonds next...
The yield to maturity on one-year zero coupon bonds is 4.54%. The yield to maturity on...
The yield to maturity on one-year zero coupon bonds is 4.54%. The yield to maturity on two-year zero coupon bonds is 6.62%. a. What is the forward rate of interest for the second year? Forward rate = According to the expectations hypothesis, what is the expected value of the one-year interest rate for next year? Expected Value=
The yield to maturity on one-year zero-coupon bonds is 8.2%. The yield to maturity on two-year zero-coupon bonds is 9.2%. a. What is the forward rate of interest for the second year? (Do not round in...
The yield to maturity on one-year zero-coupon bonds is 8.2%. The yield to maturity on two-year zero-coupon bonds is 9.2%. a. What is the forward rate of interest for the second year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Forward rate of interest b. If you believe in the expectations hypothesis, what is your best guess as to the expected value of the short-term interest rate next year? (Do not r answer to 2 decimal...
pls help 5. The following is a list of prices for zero coupon bonds with different...
pls help
5. The following is a list of prices for zero coupon bonds with different maturities and par value of $1,000. Maturity (Years) Price $943.40 $881.68 $808.88 $742.09 a. What is, according to the expectations theory, the expected one-year forward rate in the third year? (i.e. borrow two years from now, repay three years from now) b. Suppose you have entered a forward contract, promising to lend customer A $1 million two years from now, who will repay you...
a) The price of a 4-year zero coupon government bond is 79.81. What is the yield...
a) The price of a 4-year zero coupon government bond is 79.81. What is the yield to maturity (effective annual yield) on the 4-year bond? b) The price of a 3-year zero coupon government bond is 85.16. What is the yield to maturity (effective annual yield) on the 3-year bond? The prices of 1, 2, 3, and 4-year zero coupon government bonds are 95.42, 90.36, 85.16, and 79.81, respectively. What is the implied 2-year forward rate between years 2 and...
The yield to maturity (YTM) on 1-year zero-coupon bonds is 4% and the YTM on 2-year zeros is 5%. The yield to maturity on 2-year-maturity coupon bonds with coupon rates of 9% (paid annually) is 4.5%. a. What arbitrage opportunity is available for an investment banking firm? and $ The arbitrage strategy is to buy zeros with face values of $ , and respective maturities of one year and two years. b. What is the profit on the activity? (Do...
Suppose that you observe the following prices of three zero-coupon bonds issued by the government: YTM (spot rate) Price 985.22 1-year zero-coupon bond X 2-year zero-coupon bond Y 3-year zero-coupon bond Z Face value 1,000 1,000 1,000 P2 4% 901.94 Questions: A. (4 pts) Draw a yield curve based on the above three zero-coupon bonds. Comment on the shape. B. (6 pts) Calculate the implied 1-year forward interest rate, two years from now (i.e. f2.a)
The yield to maturity (YTM) on 1-year zero-coupon bonds is 5% and the YTM on 2-year zeros is 6%. The yield to maturity on 2-year- maturity coupon bonds with coupon rates of 9% (paid annually) is 5.9%. a. What arbitrage opportunity is available for an investment banking firm? The arbitrage strategy is to buy zeros with face values of $ D and $C , and respective maturities of one year and two years. b. What is the profit on the...
The current yield curve for default-free zero-coupon bonds is as follows: Maturity (Years) 10 YTM (%) 10.5% 11.5 12.5 points a. What are the implied 1-year forward rates? (Do not round intermediate calculations. Round your answers to 2 decimal places.) eBook Forward Rate Maturity 2 years 3 years Print References b. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will be the yield to maturity on 1-year zero-coupon bonds next...
The yield to maturity on one-year zero-coupon bonds is 8.2%. The yield to maturity on two-year zero-coupon bonds is 9.2%. a. What is the forward rate of interest for the second year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Forward rate of interest b. If you believe in the expectations hypothesis, what is your best guess as to the expected value of the short-term interest rate next year? (Do not r answer to 2 decimal...
pls help
5. The following is a list of prices for zero coupon bonds with different maturities and par value of $1,000. Maturity (Years) Price $943.40 $881.68 $808.88 $742.09 a. What is, according to the expectations theory, the expected one-year forward rate in the third year? (i.e. borrow two years from now, repay three years from now) b. Suppose you have entered a forward contract, promising to lend customer A $1 million two years from now, who will repay you...
a) The price of a 4-year zero coupon government bond is 79.81. What is the yield to maturity (effective annual yield) on the 4-year bond? b) The price of a 3-year zero coupon government bond is 85.16. What is the yield to maturity (effective annual yield) on the 3-year bond? The prices of 1, 2, 3, and 4-year zero coupon government bonds are 95.42, 90.36, 85.16, and 79.81, respectively. What is the implied 2-year forward rate between years 2 and...
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