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- What is interest rate (or price) risk? Which bondhas more interest rate risk: an annual payment1-year bond or a 10-year bond? Why?Which has morereinvestment rate risk: a 1-year bond or a 10-yearbond?Which type of bonds will have more volatile prices and returns? A. 30-year Treasuries B. 10-year Treasuries
- 6. Pure expectations theory The pure expectations theory, or the expectations hypothesis, asserts that long-term interest rates can be used to estimate future short-term interest rates. A. Based on the pure expectations theory, is the following statement true or false? The pure expectations theory assumes that a one-year bond purchased today will have the same return as a one-year bond purchased five years from now. False True B. The yield on a one-year Treasury security is 5.8400%, and the two-year Treasury security has a 8.7600% yield. Assuming that the pure expectations theory is correct, what is the market’s estimate of the one-year Treasury rate one year from now? (Note: Do not round your intermediate calculations.) 14.936% 13.4071% 11.7606% 9.9965% C. Recall that on a one-year Treasury security the yield is 5.8400% and 8.7600% on a two-year Treasury security. Suppose the one-year security does not have a…True or false? The liquidity premium theory of the term structure indicates that today's long-term interest rate equals the average of short-term interest rates that people expect to occur over the life of the long-term bond. Question 17 options: True FalseD3) Currently, the market interest rate on a bond is 10%. Yield-to-Maturity is a return you can reliaze when you are investing in a bond until its maturity. If you decide to sell the bond before the maturity, what would be your realized return like? and why?
- 10-2 The rate of return that you would earn if you bought a bond and held it to its maturity date is called the bond's yield to maturity, or YTM. If interest rates in the economy rise after a bond has been issued, what will happen to the bond's price and to its YTM? Does the length of time to maturity affect the extent to which a given change in interest rates will affect the bond's price?QUESTION 2 Treasury bond has maturity between 1 yr < t < 10 years. True False5 Which of the following describes yield to maturity? Select one alternative O A single discount rate that gives the value of a bond equal to its market price when applied to all cash flows. O The coupon rate that causes a bond price to equal its par (or principal) value. O Interest rate earned on an investment that starts today and last for n-years in the future without coupons. O Interest rates implied by current zero rates for future periods of time.
- Question 4 Which of the following bonds has the HIGHEST Reinvestment Rate Risk? O A 10-Year Bond with a 10 Percent Annual Coupon O A 3-Year Bond with a 10 Percent Annual Coupon O A 5-Year Zero Coupon Bond O A 10-Year Zero-Coupon Bond Ouestion 51 Derive i, +i iz, lt It+1 2 2 According to the Expectations Theory of the term structure, if interest rates are expected to be 2%, 2%, 4%, and 5% over the next four years, what is the yield on a three-year bond today?7. A. Define duration and explain how duration is used in the management of a portfolio of financial securities. B. Why is duration a better measurement of interest rate risk than the time it takes to reduce the principal balance on a loan by 50%? C. How does maturity and yield affect the sensitivity of a financial security to changes in interest rates?