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Suppose the two-year spot rate in one year is 11.53% and the two-year spot rate

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1.Suppose the two-year spot rate in one year is 11.53% and the two-year spot rate in two years is 14.08%. Further assume that the liquidity preference theory holds and the liquidity premium is constant at 1%. What is the expected two-year forward rate in one year? And what is the expected two-year forward rate in two years?;2. A corporate bond paying a 10% coupon rate with semi-annual payments is currently selling at par. What interest rate would have to be offered on a bond (also selling at par) of similar risk that only paid annually to make you indifferent between the two bonds;3.Rank the following three debt securities in terms of lowest EFFECTIVE annual interest rate to largest.;a. A one year zero paying 8%;b. A one year corporate bond selling for par paying semi-annual payments with a (annual) coupon rate of 8%;c. A three month treasury bill selling at $98,000 with a par value of Y$100,000.;4. You observe the following prices in the WSJ for zero coupon bonds;Maturity (years) Price;1 952.38;2 890.00;3 816.30;a. Calculate the zero coupon spot rates that must accompany these bonds;b. Calculate one year forward rates implied by this data, 1f2 and 2f3;Additional Requirements;Min Pages: 1;Level of Detail: Show all work

 

Paper#26447 | Written in 18-Jul-2015

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