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term%20structure

# term%20structure - Session 4 Term Structure of Interest...

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1 Session 4: Term Structure of Interest Rates A. Both rates (i) are annualised returns (not effective rates), (ii) use the settlement price as the cost base, and (iii) are total returns accounting for both the coupon interest component and the capital gain/loss component. While YTM can be observed in the market and is set by the market, HPR is not reported to the market and is not set by the market. While YTM is quoted on the assumption that the coupon interests are all reinvested at the same rate as the quoted YTM and the bond is held to maturity, HPR allows for different reinvestment rates for coupon interests received at different times and the bond to be sold before maturity. B. Coupon rate (% pa) Time to Maturity (year) YTM (% pa) 7.5 1 8.20 10.5 2 7.70 8.0 3 7.40 6.0 4 7.00 6.0 5 6.85 i) The same holding period return of 8.20% is expected. To compute f(1), the price of the 2-year bond is first computed: 10.5/1.077 + 110.5/1.077 2 = \$105.014 before applying the present value concept to suggests that 105.014 = 10.5/1.082 + 110.5/[(1+8.20%)(1+f(1))], hence f(1) = 7.15%.

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term%20structure - Session 4 Term Structure of Interest...

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