The current yield curve for default-free zero-coupon bonds is as follows Maturit

Question

The current yield curve for default-free zero-coupon bonds is as follows Maturity (years) YTM 9.4% 10.4 11.4 2 a. What are the implied one-year forward rates? (Do not round intermediate calculations. Round your answers to 2 decimal places.) Maturity (years) YTM Forward Rate 9.4% 10.4% 11.4% 2 b. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will the pure yield curve (that is, the yields to maturity on one- and two-year zero-coupon bonds) be next year? There will be a shift upwards in next year's curve There will be a shift downwards in next year's curve There will be no change in next years curve c-1. If you purchase a two-year zero-coupon bond now, what is the expected total rate of return over the next year? (Hint: Compute the current and expected future prices.) Ignore taxes. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Expected total rate of return c-2. If you purchase a three-year zero-coupon bond now, what is the expected total rate of return over the next year? (Hint: Compute the current and expected future prices.) lgnore taxes. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Expected total rate of return

Explanation / Answer

1.

Forward rate 1R2=1.104^2/1.094-1=11.4091%

Forward rate 2R3=1.114^3/1.104^2-1=13.4273%

2.

There will be a shift upwards

3.

Price now=100/1.104^2=82.046

Price next year=100/1.11491=89.69

Expected total return=89.69/82.046-1=9.4%

4.

Forward rate for 2 years 1 year from now=(1.114^3/1.094)^0.5-1=12.4137%

Price now=100/1.114^3=72.334

Price next year=100/1.124137^2=79.13371

Expected total return=79.13371/72.334-1=9.4%

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.