21. Consider the g $1,00o Bond par value z ears to laturityield to Maturity 7.50

Question

21. Consider the g $1,00o Bond par value z ears to laturityield to Maturity 7.50% 7.99% 8.49% 10). 70% According to the expectations hypothesis, the expected one-year from now should be interest rate one year A) B) C) D) 790 8% 9% 10% 22. Consider a 7-year bond with a 9% coupon and a yield to maturity of 1296. If interest rates remain constant, one year from now the price of this bond will be A) higher B) C) D) lower the same cannot be determined 23. We observe that the slope of yield curve is negative. According to the pure expectations hypothesis of the term structure of interest rates, this is an indication that A) B) C) D) short term interest rate is expected to rise in the future Iong term interest rate is expected to rise in the future short term interest rate is expected to fall in the future long term interest rate is expected to fall in the future 24. Other things being equal, which of the following has the longest duration? A) a 15 year bond with a 10% coupon B) C) a 20 year bond with a 7% coupon a 20 year bond with a 9% coupon D) a 10 year zero coupon bond 25. A bond currently has a price of $1,030. The present yield on the bond is 8 the yield changes from 8.00% to 8.10%, the price of the bond will go dow The duration of this bond is A) 10.5 B) 8.5 9.7 ) 10.5

Explanation / Answer

(21) The Expectations Hypothesis states that an investor earns the same amount of interest by investing in a short term instrument of one year and then rolling over the proceeds of this investment into the next one year investment and so on as compared to investing in a single instrument of maturity equal to the total number of one year investments. This essentially means that if an investor invests in a one year bond and rolls over the proceeds into another one year bond at the end of Year 1, the interest earned would be equal to what he/she would have earned by investing in a 2 year bond.

Let the expected one year interest rate one year from now be y %

One year interest rate at present = YTM on 1 year bond = 6% and Two year interest rate at present = YTM on 2 year bond = 7.5%

Now if receipts of two consecutive investments of one year each and one straight investment of 2 year are both equal to $100 , then by time value of money and equivalence of the two investments :

100 /(1.06)x(1+y) = 100/(1.075)^2

Solving the above equation y = .0902 OR 9%

Therefore, answer is option (C)

NOTE: Please raise separate questions for answer to the remaining questions in the image.

Related Questions

Navigate

• Browse (All)
• Browse 2
• Subjects

---

---

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