Chapter 7 Term Structure - Chapter 7 Term Structure 5...

This preview shows page 1 - 6 out of 41 pages.

Chapter 7 Term Structure 5. Assume that the Pure Expectations Theory of the Term Structure is correct and that the expected one year rates for each of the next three years are Year 1 = 5%, Year 2 = 6%, and Year 3 = 7%. Assume now that a corporate bond has a par value of $1,000, 3 years until it matures, and pays $50 in interest on an annual basis each year (you should now be able to calculate the price of this bond – see table below). What is the yield to maturity for this bond? Year Cash Flow Yearly Rate Present Value 1 $50 5% 2 $50 6% 3 $1050 7% ($1050)(1/1.05)(1/1.06)(1/1.07)=$881.68 Current Price = A. 5.86% B. 6.16% C. 5.96% D. 6.26% E. 6.06%
1
Chapter 7 Term Structure 5. Assume that the Pure Expectations Theory of the Term Structure is correct and that the expected one year rates for each of the next three years are Year 1 = 5%, Year 2 = 6%, and Year 3 = 7%. Assume now that a corporate bond has a par value of $1,000, 3 years until it matures, and pays $50 in interest on an annual basis each year (you should now be able to calculate the price of this bond – see table below). What is the yield to maturity for this bond?
2
Chapter 7 Term Structure 22. You plan to buy a 10-year bond that pays interest of $55 every six months and has a maturity value of $1,000. You require a 12 percent nominal annual rate of return. If you plan to hold this bond for only 5 years (you would sell it after receiving coupon payments 1-10, and the buyer would then receive coupon payments 11-20), but believe that the market (investors) will require a nominal rate of return of only 10% at this time, then what should you be willing to pay for this bond today?
3
Chapter 7 Term Structure 22. You plan to buy a 10-year bond that pays interest of $55 every six months and has a maturity value of $1,000. You require a 12 percent nominal annual rate of return. If you plan to hold this bond for only 5 years (you would sell it after receiving coupon payments 1-10, and the buyer would then receive coupon payments 11-20), but believe that the market (investors) will require a nominal rate of return of only 10% at this time, then what should you be willing to pay for this bond today?
4
Chapter 7 Term Structure

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture