Homework 3

Homework 3 - , Finance Homework 3 ARE 171A Winter 2011 A....

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, ARE 171A Finance Homework 3 Winter 2011 A. Havenner Seven questions on three pages. Please show your setup equations explicitly, and box your answers. Price bonds per $1,000 of face value, assuming coupons pay semi-annually unless otherwise stated (as in question 1). Stock dividends are quarterly unless otherwise stated. [10] 1. Suppose the one year AA corporate bond rate is 5.875% and the two year rate is 6.25%. A $1,000 face value classroom bond pays coupons annually of $50 and matures exactly two years from today; what is its value? (Show your setup explicitly so that we can see how you solved this problem.) 2. Treasury Strips (np) are Treasury obligations that have had the coupons stripped off, i. e., they are pure discount bonds. 1 The January 19,2011 Wall Street Journal reported the following annualized spot yields to maturity for U.S. Treasury np Strips: Years to Maturity % Yield Notation 1 0.27 r l 2 0.60 r z 3 1.01 r 3 Be sure to use the class notation (e.g., r 1 and f l ) and show your setup including timing diagrams in answering the questions below. Notice that yields are in annual percent, so e.g., the yield of .27% implies an annual interest rate of .0027. [8] i) What is the implied forward rate from year 1 to year 2 according to the Expectations Hypothesis? ii) What is the implied forward rate from year 2 to year 3 according to the Expectations Hypothesis? [3] iii) Is this a normal yield curve or an inverted yield curve, and very briefly, why?
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This note was uploaded on 02/27/2012 for the course ARE 171A taught by Professor Whitney during the Spring '08 term at UC Davis.

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Homework 3 - , Finance Homework 3 ARE 171A Winter 2011 A....

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