Fill in the table below for the following zero-coupon bonds, all or which have p
ID: 2778552 • Letter: F
Question
Fill in the table below for the following zero-coupon bonds, all or which have par values of $1,000.. (Do not round intermediate calculations. Round your answers to 2 decimal places.) A newly issued 20-year maturity, zero-coupon bond is issued with a yield to maturity of 8.2% and face value $1,000. Find the imputed interest income in the first, second, and last year of the bond's life. (Do not round intermediate calculations. Round your answers to 2 decimal places.) The yield to maturity on one-year zero-coupon bonds is 8%. The yield to maturity on two-year zero-coupon bonds is 9%. What is the forward rate of interest for the second year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) If you believe in the expectations hypothesis, what is your best guess as to the expected value of the short-term interest rate next year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Short-term interest rate.Explanation / Answer
9.a. Remember that the convention is to use semi-annual periods:
Price of a zero-coupon bond =Face value/(1 + Semiannual YTM)^T
Bond equivalent YTM = Semi-annual YTM × 2
vi). 340 = 1000/(1.037)^t
1.037^t = 1000/340
1.037^t = 2.9412
t*ln(1.037) = ln(2.9412)
t = ln(2.9412)/ln(1.037)
t = 1.0788/0.0363 = 29.69
b. Imputed interest is increase in constant yield value.
The price schedule is as follows:
242.05 - 223.71 = 18.34
10. a. The forward rate (f2) is the rate that makes the return from rolling over one-year bonds the same as the return from investing in the two-year maturity bond and holding to maturity:
1.08 *(1 + f2) = (1.09)^2
f2 = 0.1001 = 10.01%
b. According to the expectations hypothesis, the forward rate exceeds the expected value of the short-term interest rate next year, so the best guess would be 10.01%.
Price Maturity(Years) Maturity(Half-Years) Semi-Annual YTM Bond Equivalent YTM $340 20 40 2.73% 5.47% $660 20 40 1.04% 2.09% $440 10 20 4.19% 8.38% $399.09 10 20 4.70% 9.40% $532.61 10 20 3.20% 6.40% $340 14.85 29.69 3.70% 7.40%Related Questions
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