S07Assg4

S07Assg4 - FIN 2200 CORPORATION FINANCE Sum, 2007...

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FIN 2200 – CORPORATION FINANCE Sum, 2007 Instructors: A. Dua Assignment #4 NOTE: This assignment is not to be submitted? 1. Spot rates of interest for zero-coupon Government of Canada bonds are observed for different terms to maturity as follows: Term to maturity Rate (r i ) 1 year from today 5.75% 2 years from today 6.25% 3 years from today 6.35% 4 years from today 6.25% 5 years from today 6.40% a) What is the forward rate of interest from year 2 to year 3, i.e., what is f 3 ? b) What is the forward rate of interest from year 3 to year 4, i.e., what is f 4 ? c) If you believe in the pure expectations theory, what does your answer to (a) imply about E[ 2 r 3 ]? If you believe in the augmented expectations theory, what does your answer to (a) imply about E[ 2 r 3 ]? d) If you believe in the pure expectations theory, what does your answer to (b) imply about E[ 3 r 4 ]? If you believe in the augmented expectations theory, what does your answer to (b) imply about E[ 3 r 4 ]? e) Suppose a zero-coupon bond has a face value of $1,000 and matures 5 years from today. i)
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This note was uploaded on 04/06/2010 for the course ECON 2342 taught by Professor James during the Three '09 term at ADFA.

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S07Assg4 - FIN 2200 CORPORATION FINANCE Sum, 2007...

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