Par values of both the 1-year zero and the 2-Year zero are $1,000. Suppose that

Question

Par values of both the 1-year zero and the 2-Year zero are $1,000. Suppose that the short rate today is 6 percent and the expected short rate next year is 9 percent. A. Find the price of the 2-Year zero under the Expectation Hypothesis. B. Find the price at which the 2-year zero can be sold after holing it for one year under the expectations Hypothesis. C. Suppose a short term-investor (one that is interested only in 1-Year investments) ios willing to pay $800 for the 2-Year zero. Find the expected holding period return given this privet that the investor is willing to pay. D. Find the rest - premium implied by the expected holding period return. E. Find the yield to maturity of the 2-Year zero given the par value and the price that the investor demands. F. Find the forward rate implied by this yield to maturity. G. Find the Liquidity Premium resulting from this forward rate.

Explanation / Answer

The price after 2 years is 1.06×1.09= 1.1554 = 15.54%

so new price is 1000× 1.1554= 1554

b.It can be sold at 1.09^2 × 1000 = 1881

c. holding period return is end price - beginnimg price / beginning price

1881 - 800/800 = 120%

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

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