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Maturity
1
2
3
4
Price
Rs.943.40
898.47
847.62
792.16
YTM
6.00%
5.50%
5.67%
6.00%
Forward Rate
(1.0552/1.06) 1 = 5.0%
(1.05673/1.0552) 1 = 6.0%
(1.064/1.05673) 1 = 7.0%
5.
Beginning
of Year
Expected Price
792.16
6.
a.
1,000
= rs .839 .69 (881.68/$839.69) 1 = 5.00%
1.05 1.06 1.07
1,000
= Rs .881 .68
1.06 1.07
1,000
= Rs .934 .58
1.07
(934.58/$881.68) 1 = 6.00%
(1,000.00/$934.58) 1 = 7.00%
A 3-year zero coupon bond with face value $100 will sell today at a yield of
6% and a price of:
100/1.063 =R.s83.96
Next year, the bond will have a two-year maturity, and therefore a yield of 6%
(from next years forecasted yield curve). The price will be Rs.100/1.06 2
=
89.00, resulting in a holding period return of 6%.
b.
Forward Rate
(1.052/1.04) 1 = 6.01%
(1.063/1.052) 1 = 8.03%
Using the forward rates, the forecast for the yield curve next year is:
Maturity YTM
1
6.01%
2
(1.0601 1.0803)1/2 1 = 7.02%
The market forecast is for a higher YTM on 2year bonds than your forecast.
Thus, the market predicts a lower price and higher rate of return.
7.
a.
P=9/1.07+109/1.082=Rs.101.86
b.
(1.08 ) 2
= 1.0901 f 2 = 0.0901 = 9.01%.
1.07
Therefore, using an expected rate for next year of r2 = 9.01%, we find that the
forecast bond price is:
P=109/1.0901=Rs.99.9
d.
8.
a.
b.
If one year from now y = 8%, then the bond price will be:
[$85 Annuity factor (8%, 2)] + [$1,000 PV factor (8%,2)] = Rs.1,008.92
The holding period rate of return is:
[$85 + (1,008.92 1,040.20)]/1,040.20 = 0.0516 = 5.16%
9.
Year
1
2
3
Forward
Rate
5%
7%
8%
c.
Period
1
2
3
Payment received
at end of period:
60.00
60.00
1,060.00
Will grow by
a factor of:
1.07 1.08
1.08
1.00
To a future
value of:
69.34
64.80
1,060.00
1,194.14
$1,194 .14
$984 .10
1 + y realized =
d.
12.
a.
60 + ( 2.18 )
= 0.0588 = 5.88 %
984 .10
The one-year zero-coupon bond has a yield to maturity of 6%, as shown below:
94 .34 =
100
y1 = 0.06000 = 6.000%
1 + y1
100
y2 = 0.08472 = 8.472%
(1 + y 2 ) 2
12
112
= 106 .51
The price of the coupon bond is: 1.06 +
(1.08472 ) 2
b.
f2 =
(1 + y 2 ) 2
(1.08472 ) 2
1 =
1 = 0.1100 = 11.00%
1 + y1
1.06
c.Expected price = Rs .
112
= Rs .100 .90
1.11
(Note that next year, the coupon bond will have one payment left.)
Expected holding period return =
12 + (100 .90 106 .51)
= 0.0600 = 6.00 %
106 .51
This holding period return is the same as the return on the one-year zero.
d.
112
> 100 .90
1 + E ( r2 )
E(HPR) > 6%
13.
a.
b.
YTM
10%
11%
12%
Forward Rate
(1.112/1.10) 1 = 12.01%
(1.123/1.112) 1 = 14.03%
We obtain next years prices and yields by discounting each zeros face value
at the forward rates for next year that we derived in part (a):
Maturity
1 year
2 years
Price
1,000/1.1201 = $892.78
1,000/(1.1201 1.1403) = $782.93
YTM
12.01
%
13.02
%
Note that this years upward sloping yield curve implies, according to the
expectations hypothesis, a shift upward in next years curve.
c. Next year, the 2-year zero will be a 1-year zero, and will therefore sell at a price
of: 1,000/1.1201 = Rs.892.78
Similarly, the current 3-year zero will be a 2-year zero and will sell for: Rs.782.93
Expected total rate of return:
2-year bond:
892 .78
1 = 1.1000 1 = 10 .00 %
811 .62
3-year bond:
782 .93
1 = 1.1000 1 = 10 .00 %
711 .78
d.
Current price = (120 0.90909) + (120 0.81162) + (1,120 0.71178)
= 109.0908 + 97.3944 + 797.1936 = Rs.1,003.68
Expected price 1 year from now = (120 0.89278) + (1,120 0.78293)
= 107.1336 + 876.8816 = Rs.984.02
Total expected rate of return =
$120 + ($ 984 .02 $1,003 .68 )
= 0.1000 = 10 .00 %
$1,003 .68
a.
100 ,000
1 = 1.02412
97 ,645
b.
1 = 0.100 = 10 .0%
5.
The effective annual yield on the semiannual coupon bonds is 8.16%. If the annual
coupon bonds are to sell at par they must offer the same yield, which requires an
annual coupon rate of 8.16%.
7.
Yield to maturity
n = 3, P=953.10 and M = 1000
This results in: YTM = 9.84%
Realized compound yield: First, find the future value (FV) of reinvested coupons
and principal:
FV = (80 1.10 1.12) + (80 1.12) + 1,080 = Rs.1,268.16
Then find the rate (yrealized ) that makes the FV of the purchase price equal to $1,268.16:
953.10 (1 + yrealized )3 = $1,268.16 yrealized = 9.99% or approximately 10%
9.
a.
c.Keeping other inputs unchanged but setting P=1050, we find a bond equivalent
yield to maturity of 7.52%, or 3.76% on a semi-annual basis.
Effective annual yield to maturity = (1.0376)2 1 = 0.0766 = 7.66%
10. a) 8.51
b) 8%
c) 7.52