# bff5040tute-9answer - BK Ch 15 Q10 a A 3-year zero coupon...

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BK Ch 15: Q10 a. A 3-year zero coupon bond with face value \$100 will sell today at a yield of 6% and a price of: \$100/1.06 3 =\$83.96 Next year, the bond will have a two-year maturity, and therefore a yield of 6% (from next year’s forecasted yield curve). The price will be \$89.00, resulting in a holding period return of 6%. b. The forward rates based on today’s yield curve are as follows: Year Forward Rate 2 (1.05 2 /1.04) – 1 = 6.01% 3 (1.06 3 /1.05 2 ) – 1 = 8.03% Using the forward rates, the forecast for the yield curve next year is: Maturity YTM y 1 6.01% 2 (1.0601 × 1.0803) 1/2 – 1 = 7.02% The market forecast is for a higher YTM on 2–year bonds than your forecast. Thus, the market predicts a lower price and higher rate of return. Q12 a. The current bond price is: (\$85 x 0.94340) + (\$85 x 0.87352) + (\$1,085 x 0.81637) = \$1,040.20 This price implies a yield to maturity of 6.97%, as shown by the following: [\$85 x Annuity factor (6.97%, 3)] + [\$1,000 x PV factor (6.97%, 3)] = \$1,040.17 b. If one year from now y = 8%, then the bond price will be: [\$85 x Annuity factor (8%, 2)] + [\$1,000 x PV factor (8%, 2)] = \$1,008.92 The holding period rate of return is: [\$85 + (\$1,008.92 – \$1,040.20)]/\$1,040.20 = 0.0516 = 5.16% Q14 a. The return on the one-year zero-coupon bond will be 6.1%. The price of the 4-year zero today is: \$1,000/1.064 4 = \$780.25 Next year, if the yield curve is unchanged, today’s 4-year zero coupon bond will have a 3- year maturity, a YTM of 6.3%, and therefore the price will be: \$1,000/1.063 3 = \$832.53 The resulting one-year rate of return will be: 6.70% Therefore, in this case, the longer-term bond is expected to provide the higher return because its YTM is expected to decline during the holding period. b. If you believe in the expectations hypothesis, you would not expect that the yield curve next year will be the same as today’s curve. The upward slope in today's curve would be

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