21_liquidity preference theory

21_liquidity preference theory - 410 HW #21 e 1. As of end...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
410 HW #21 1. As of end of year 2010: % 3 %, 3 %, 3 1 1 2 1 = = = + e t t t YTM YTM YTM Face value of all bonds: 1000 All bonds for this problem pay zero coupon. Strategy 1: Buy 1 year bond, roll over to another 1 year bond. Strategy 2: Buy 2 year bond (matures at end of 2012) a. What is the current price of the 1-year bond? What is the current price of the two- year bond? b. Suppose at the end of 2011 you need to liquidate and get out of either strategy. Suppose your prior expectation of future spot rates was correct, so that as of the end of 2011 %. 3 1 = t YTM Calculate the returns from liquidating strategy 1 and strategy 2. c. Suppose at the end of 2011 you need to liquidate and get out of either strategy. Suppose your prior expectation of future spot rates was incorrect , so that as of the end of 2011 %. 5 1 = t YTM Calculate the returns from liquidating strategy 1 and strategy 2. d. In light of your answers above, explain why investors would probably not be willing to buy the two year bond at the end of 2010 if its YTM is only 3%. e.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/17/2011 for the course BUS M 410 taught by Professor Brianboyer during the Fall '10 term at BYU.

Page1 / 3

21_liquidity preference theory - 410 HW #21 e 1. As of end...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online