ps4sol - Financial Economics V 3025 Fall 2009 Rajiv Sethi...

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Unformatted text preview: Financial Economics V 3025 Fall 2009 Rajiv Sethi 5B Lehman Phone: 854 5140 [email protected] Problem Set 4 Solutions 1. If the current yields for 5 and 10 year US Treasury bonds are 2.16% and 3.35% respec- tively then (assuming that these yields correspond to zero coupon bonds) their current prices must be: P 5 = 100 1 : 0216 5 = 89 : 866 P 10 = 100 1 : 0335 10 = 71 : 928 Let P denote the the price at which the current 10 year bond will sell after 5 years. If investors are extremely con&dent regarding their forecast of P then buying the 5 year bond to hold to maturity should earn the same yield as buying the 10 year bond for resale, so 71 : 928 = P 1 : 0216 5 and P = 80 : 039 : To &nd investor expectations regarding the yield on 5 year bonds in November 2014, solve 80 : 039 = 100 (1 + r ) 5 The solution is r = 4 : 55% so investors expect the &ve year rate to rise. 2. Suppose that a zero coupon bond which matures after one year and has face value $1000 is priced at $943 : 40 ; while a similar bond which matures after two years costs...
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This note was uploaded on 02/10/2010 for the course IEOR 3600 taught by Professor Chudnovsky during the Winter '09 term at Columbia.

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ps4sol - Financial Economics V 3025 Fall 2009 Rajiv Sethi...

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