Chapter 3: 10-9B (page 329)
A bond with an annual coupon rate of 4.8% sells for $970. What is the bond’s current yield?
The current yield is 4.95%.
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Question: The current yield curve for default-free zero-coupon bonds is as follows:
Maturity (Years) | YTM |
1 | 10% |
2 | 11% |
3 | 12% |
a. What are the implied one-year forward rates?
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?
c. If you purchase a two-year zero-coupon bond now, what is the expected total rate of return over the next year? What if you purchase a three-year zero-coupon bond?
(Hint: Compute the current and expected future prices.) Ignore taxes.
Noah Kramer, a fixed-income portfolio manager based in the country of Sevista, is considering the purchase of a Sevista government bond. Kramer decides to evaluate two strategies for implementing his investment in Sevista bonds.
Table 11.6 gives the details of the two strategies, and Table 11.7 contains the assumptions that apply to both strategies.
Before choosing one of the two bond investment strategies, Kramer wants to analyze how the market value of the bonds will change if an instantaneous interest rate shift occurs immediately after his investment.
The details of the interest rate shift are shown in Table 11.8. Calculate, for the instantaneous interest rate shift shown in Table 11.8, the percent change in the market value of the bonds that will occur under each strategy.
Question: The following table contains spot rates and forward rates for three years. However, the labels got mixed up. Can you identify which row of the interest rates represents spot rates and which one the forward rates?
Year | 1 | 2 | 3 | |
Spot rate of Forward rates? | 10.00% | 12.00% | 14.00% | |
Spot rate of Forward rates? | 10.00% | 14.0364% | 18.1078% |
A pension plan is obligated to make disbursements of \(1 million, \)2 million, and $1 million at the end of the next three years, respectively. Find the duration of the plan’s obligations if the interest rate is 10% annually.
A bond with a coupon rate of 7% makes semi-annual coupon payments on January 15 and July 15 of each year. The Wall Street Journal reports the ask price for the bond on January 30 at 100:02. What is the invoice price of the bond? The coupon period has 182 days.
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