hw - 1. As of end of year 2011: Face value of all bonds:...

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1. As of end of year 2011: 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 2013) 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 2012 you experience a liquidity shock (you need cash) and you decide to terminate your investment strategy. If you had invested in Strategy 1, what would be the return on your investment to this point? c. Again, suppose at the end of 2012 you experience a liquidity shock (you need cash) and you decide to terminate your investment strategy. If you had invested in Strategy 2, what would be the return on your investment to this point? Suppose your prior expectation of future spot rates was correct, so that as of the end of 2012 d. Repeat (c) but now suppose your prior expectation of future spot rates was incorrect, so that as of the end of 2012 e. In light of your answers above, explain why investors would probably not be willing to buy the two year bond at the end of 2011 if its YTM is only 3%. f.
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This note was uploaded on 03/30/2012 for the course MANEC 453 taught by Professor Jerrynelson during the Fall '10 term at BYU.

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hw - 1. As of end of year 2011: Face value of all bonds:...

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