one year zero coupon bond has a yield of7.00 per cent. A two year zero coupon bo

Question

one year zero coupon bond has a yield of7.00 per cent. A two year zero coupon bond o A as a yield of 7 per cent. Bond market participants expect the one year zero coupon also to fall to 6.875 per cent next year. What is the liquidity premium included in the one year forward rate, one year from now? one year z a. Exactly zero. b. 1.25 per cent. c. 0.125 per cent. d. 0.0125 per cent. 47. You have purchased 3 stripped Treasury securities. The maturities are 4, 6, and 8 years: the yield to maturity is 6 per cent for all 3 maturities and each will pay $ 100 at maturity. What is the duration of your portfolio? a. Not more than 5.8 years b. More than 5.8 years, but not more than 5.9 years c. More than 5.9 years, but not more than 6 years d. More than 6 years. 48. You are offered two bonds with the same yield to maturity and the same duration. One as greater convexity. Which bond is more valuable? a. The bond with greater convexity is more valuable. b. The bond with greater convexity is less valuable. c. Value is independent of convexity d. Convexity adds value only when bond yields are rising. 49. A one year Treasury Bill offers a yield of 13 per cent. You require a 5 per cent real return. The tax rate is zero. What rate of inflation are you anticipating? a. Not more than 3 per cent. b. More than 3 per cent, but not more than 6 per cent. c. More than 6 per cent, but not more than 9 per cent. d. More than 9 per cent

Explanation / Answer

Question No.46

Liquidity Premium = 7.00% -6.875%

=0.125%

Option C is Correct

Question No.47

Answer B is Correct,:More than 5.8 Years , bur not More than 5.9 years

Question No.48

Anser B Is Correct : The bond with greater Convexity is less valuable.

Question No.49

Real Return = (1+return/1+inflation)-1

5% =1.13/1+inflation -1

Inflation = 7.60%

Answer C is correct; More than 6 Per cent, but not more than 9 per cent.

Year Cashflow PVF @ 6% DCF Proportion Duration 4 100 0.7921 79.21 0.3728(79.21/212.45) 1.49 6 100 .7050 70.50 0.3318 1.99 8 100 0.6274 62.74 0.2954 2.36 Total 212.45 1 5.84 Years

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