The current yield curve for default free zero coupon bonds is as follows: Consid

Question

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

Consider M is the month of your birthday. (December).

Take D = M if M > 5; and D = M + 5 for M < 5

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? Ignore taxes.

This needs to be done in Excel (formulas). Also, I need a summary report (your thoughts about it).

Thank you.

Explanation / Answer

Answer:

Current yield = Annual coupon/ Current price

Current yield is a bond's annual return based on its annual coupon payments and current price (as opposed to its original price or face). The formula for current yield is a bond's annual coupons divided by its current price.

And yield to maturity is The Yield to maturity (YTM), book yield or redemption yield of a bond or other fixed-interest security, such as gilts, is the internal rate of return (IRR, overall interest rate) earned by an investor who buys the bond today at the market price, assuming that the bond will be held until maturity, and that all coupon will be re invested every year.

Since the yield is dependent on the months therefore the minimum / implied yiled would be 5% because if month is 0 which is less than 5 u get a return 0+5 = 5%

If the market expectations are accurate and month is more than 5 months then the total yield in 1st year would be 5% and 2nd year it would be 6% that is 1 year and 2 year bonds.

Zero coupon bonds are bonds wich donot get any interest or coupons in between it sells at dixcount and matures at par value.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

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