The yield to maturity on 1-year zero-coupon bonds is currently 8.5%; the YTM on
ID: 2763586 • Letter: T
Question
The yield to maturity on 1-year zero-coupon bonds is currently 8.5%; the YTM on 2-year zeros is 9.5%. The Treasury plans to issue a 2-year maturity coupon bond, paying coupons once per year with a coupon rate of 11%. The face value of the bond is $100. At what price will the bond sell? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.) Price $ 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.) Yield to maturity % 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 $ Recalculate your answer to (c) if you believe in the liquidity preference theory and you believe that the liquidity premium is 1.5%. (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the"$" sign in your response.)Explanation / Answer
a) Computation of selling price of the Bond
Annual interest = 11% of 100 = $ 11
Bond Price = 11 / ( 1+ 0.085)1 + 111/ ( 1.095)2
= $ 10.14 + $ 92.57
= $ 102.71
b) YTM :
$ 102.71 = 11/(1+r)1 + 11/(1+r)2 + 100/ ( 1+r)2
r = 9.44%
c) The forward rate for next year, derived fromm the zero coupon yield curve, is approaximately 11%:
1 + F2 = [ (1.095)2 / 1.07 ]
1 + F2 = 1.1206
F2 or r2 = 12.06%
then P = $ 111/ 1.1206
= $ 99
d) If the liquidity premuim is 1.5%, then the forecast interest rate is:
E ( r2 ) = F2 - Liquidity premium
= 12.06% - 1.5%
= 10.56%
and you forcast the bond to sellt at : 111/1.1056 = $ 100.40
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.