Assume that the real, risk-free rate of interest is expected to be constant over time at 3 percent, and that the annual yield on a 6-year corporate bond is 8.00 percent, while the annual yield on a 10-year corporate bond is 7.75 percent: you may assume that the default risk and liquidity premium are the same for both bonds. Also assume that the maturity risk premium for all securities can be estimated as MRP, (0.1%) *(t-1), where t is the number of periods until maturity. Finally assume that inflation is expected to be constant at 3 percent for Years 1-6, and then constant at some rate for Years 7-10 (4 years). Given this information, determine what the market must anticipate the average annual rate of inflation will be for Years 7-10. O2.583% O 1.979% 2.281% 1.375 % 4

Assume that the real, risk-free rate of interest is expected to be constant over time at 3 percent, and that the annual yield on a 6-year corporate bond is 8.00 percent, while the annual yield on a 10-year corporate bond is 7.75 percent: you may assume that the default risk and liquidity premium are the same for both bonds. Also assume that the maturity risk premium for all securities can be estimated as MRP, (0.1%) *(t-1), where t is the number of periods until maturity. Finally assume that inflation is expected to be constant at 3 percent for Years 1-6, and then constant at some rate for Years 7-10 (4 years). Given this information, determine what the market must anticipate the average annual rate of inflation will be for Years 7-10. O2.583% O 1.979% 2.281% 1.375 % 4

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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The annual yield on a 4-year corporate security is 6.875 percent, while the annual yield on a 6-year corporate security is 7.85 percent. Assume that the real, risk-free rate of interest is expected to be constant over time at 2 percent, the default risk and liquidity premium on both securities is equal to 1.75 percent. Also assume that the maturity risk premium for all securities can be estimated as MPRt = (0.15%)*(t-1) where t is the number of periods until maturity. your analysis shows that the expected rate of inflation for year 2 is 2%. Year 3 is 3.5%. The expected rate of inflation for year 5 is 4.5%. Determine the anticipated rate of inflation for year 6.
Assume the real risk-free is 1% and the average annual expected inflation rate is 4%. The DRP and LP for bond A are each 3%, and the applicable MRP is 3%. What is Bond A's interest rate?
Assume that the real risk-free rate is 2% and the average annual expected inflation rate is 4%. The DRP and LP for Bond A are each 2%, and the applicable MRP is 3%. What is Bond A's interest rate?
Consider the following pure discount bonds with face value $1,000: Maturity Price 1 952.38 2 898.47 3 847.62 4 799.64 5 754.38 a). Find the spot rates and draw a yield curve.b). Assume that there is a constant liquidty premium that is equal to 1% across all maturities. Find the forward rates and the expected one period future interest rates.
The following table summarizes prices of various default-free zero-coupon bonds ( $100 face value): Maturity (years) 1 2 3 4 5 {:[" Price (per "$100],[" face value) "]:} $96.33 $91.98 $87.41 $82.53 $77.41 a. Compute the yield to maturity for each bond. b. Plot the zero-coupon yield curve (for the first five years). c. Is the yield curve upward-sloping, downward-sloping, or flat? Note: Assume annual compounding. a. Compute the yield to maturity for each bond. The yield on the 1-year bond is %. (Round to two decimal places.) The yield on the 2-year bond is %. (Round to two decimal places.) The yield on the 3-year bond is %. (Round to two decimal places.) The yield on the 4-year bond is enter your response here%. (Round to two decimal places.) Part 5 The yield on the 5-year bond is enter your response here%. (Round to two decimal places.) Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will…
Consider an A-rated bond and a B-rated bond. Assume that the one-year probabilities of default for the A- and B-rated bonds are 1% and 3%, respectively, and that default correlation between the two bonds is 20%. What is the joint probability of default of the two bonds?
Assume that the real risk free rate is 3% and the average annual expected inflation rate is 5%. The DRP and LP for Bond A are each 1% and the applicable MRP is 2%. What is bond A’s interest rate?
Bonds have a maturity risk premium that can be modeled as the following:MRP = (t-1) 0.3%were t represents the years to maturity. What is the Maturity risk premium of a bond that matures in 8 years? answer in % without the symbol
How do investors calculate the net present value of a bond? If a bond's coupon payment is C, the interest rate is R, and the bond's coupon payment is made in each period for T years at which time the original principal, P, is repaid, then the bond's present discounted value (PDV) is C A. PDV = + (1 + R) (1 + R? (1 + R)T B. PDV = C(1 + R) + C(1 + R)2 - + C(1 + R)T + P(1 + R)T + C P OC. PDV = - + R R2 RT RT C D. PDV = P + C C (1 + R) (1+R)2 (1 + R)T C E. PDV = + + + + (1 + R) (1+ R)2 (1 + R)T (1 + R)T If the interest rate is 9 percent, what is the present value of a perpetuity that pays $50,000 each year, forever? The perpetuity's value is $ (Enter a numeric response rounded to two decimal places.)
Consider a $1,000-par-value Bond with the following characteristics: a current market price of $761, 12 years until maturity, and an 8% coupon rate. We want to determine the discount rate that sets the present value of the bond’s expected future cash-flow stream to the bond’s current market price. You are required to determine the discount rate that equates the present value of the bond?
The bond shown in the following table attached pays interest annually. a. Calculate the yield to maturity (YTM)for the bond. b. What relationship exists between the coupon interest rate and yield to maturity and the par value and market value of a bond? Explain.
Suppose that y is the yield on a perpetual government bond that pays interest at the rate of $1 per annum. Assume that y is expressed with simply com- pounding, that interest is paid annually on the bond, and that y follows the process dy = a(y0 −y)dt + oydWt, where a, y0, and o are positive constants and dWt is a Wiener process. (a) What is the process followed by the bond price? (b) What is the expected instantaneous return (including interest and capital gains) to the holder of the bond?

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