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UNIVERSITY OF ESSEX
DEPARTMENT OF ECONOMICS
Session 2011–12
R. E. Bailey
EC372 Economics of Bond and Derivatives Markets
Exercise 1: Bond Markets and Fixed Interest Securities
1. Deﬁne the yield to maturity on a couponpaying bond with
n
years to maturity. Hence, explain
why the concept of ‘yield to maturity’ on a zerocoupon bond is easier to interpret than for a
couponpaying bond.
2. Suppose that you expect the oneperiod interest rate between 5 and 6 years into the future to be
10%, and that you observe that the price of zerocoupon bonds with 5 and 6 years to maturity
to be $73.50 and $70, respectively. (The face value of the bonds is $100.)
Design a strategy for trading in these bonds which would yield a positive expected return at
the end of 6 years. What considerations would determine whether you undertake the strategy
and, if you do, on what scale?
3. Two zerocoupon (ZC) bonds, labelled
N
and
R
will each mature
5
years from today. At
maturity, bond
N
pays $100. At maturity, bond
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This note was uploaded on 03/15/2012 for the course EC 372 taught by Professor R.e.bailey during the Spring '12 term at Uni. Essex.
 Spring '12
 R.E.Bailey
 Economics

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