Question

Currently, the term structure is as follows: One-year bonds yield 7.25%, two-year bonds yield 8.25%, three- year bonds and greater maturity bonds all yield 9.25% You are choosing between one- two-, and three- year maturity bonds all paying annual coupons of 8 25%, once a year. You strongly believe that at year-end the yield curve will be flat at 9.25% a. Calculate the one year total rate of return for the three bonds (Do not round Intermediate calculations. Round your answers to 2 decimal places.) One Year Two Years Three Years One year total rate of return b. Which bond you would buy? One year bond Two-year bond Three-year bond

Answer 1

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BOND- Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins Σ AutoSum - Cut A A Wrap Text Calibri 11 General ECopy Fill Merge & Center Paste B I U +.0 .00 .00 0 Conditional Format Cell Insert Delete Format Sort & Find & % Format Painter Clear Filter Select Formatting as Table Styles Number Editing Clipboard Font Alignment Styles Cells fox HI178 НА GZ НВ НС HD НЕ HF HG НН НI HJ HK HL HM 178 179 ONE YEAR BOND 180 $1,009.32 PO [=PV(7.25%,1,-82.5,-1000)] 181 CURRENT PRICE OF ONE YEAR BOND 182 AFTER A YEAR, IT WILL MATURE SO PRICE AT THE END OF THE YEAR $1,000.00 P1 183 184 [1000 X 8.25% 185 COUPON 82.5 C1 186 7.25% (P1+C1-PO)/PO 187 ONE YEAR RATE OF RETURN 188 189 TWO YEAR BOND $1,000.00 PO 190 [=PV(8.25%,2,-82.5,-1000)] CURRENT PRICE OF ONE YEAR BOND AFTER A YEAR, 191 $990.85 P1 PV(9.25%,1,82.5,-1000)] 192 PRICE OF THE BOND 193 194 COUPON 82.5 C1 195 7.33% (P1+C1-PO)/PO 196 ONE YEAR RATE OF RETURN 197 198 NOTE S1S3 Sheet2 S5 S6 0 S4 LP, IP, MRP, INFLATION WARRANT refund YIELD SPOT AFN BANKING CLEAN PRICE S10 BIDDING, UNDERWRITING EUAC AW LIFE 120% Rea erences WA 04:11 TENG 25-11-2019

BOND- Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins Σ AutoSum - Cut A A Wrap Text Calibri 11 General Copy Fill Paste в IU- Merge & Center Insert Delete Format +.0 .00 .00 0 Conditional Format Cell Sort & Find & % Format Painter Clear Filter Select Formatting as Table Styles Clipboard Number Editing Font Alignment Styles Cells fox HI216 НК HD GZ НА НВ НС НЕ HF HG НН HI НJ HL HM 197 198 199 200 THREE YEAR BOND $974.80 PO [=PV(9.25%,3,82.5,-1000)] 201 CURRENT PRICE OF ONE YEAR BOND AFTER A YEAR, 202 $982.47 P1 PV(9.25%, 2,-82.5,-1000)] 203 PRICE OF THE BOND 204 82.5 C1 205 COUPON 206 9.25% (P1+C1-PO)/PO 207 ONE YEAR RATE OF RETURN 208 209 210 ONE YEAR TOTAL RATE OF RETURN а 211 ONE YEAR TWO YEARS THREE YEARS 212 7.25% 7.33% 9.25% TOTAL RATE OF RETURN 213 b 214 WHICH BOND WOULD YOU BUY 215 THREE YEAR BOND AS IT HAS HIGHEST RATE OF RETURN 216 217 BIDDING, UNDERWRITING Sheet2 NOTE S1S3 CLEAN PRICE S10 S4 S6 4 AFN YIELD SPOT BANKING EUAC AW LIFE LP, IP, MRP, INFLATION WARRANT refund S5 EE 120% Rea erences WA 04:11 1ENG 25-11-2019