Ch 14:
3) Why do bond prices go down when interest rate goes up? Don’t lenders like high interest rates?byford
Answer: A bond’s coupon interest payments and principal repayment are not affected by changes in market rates. Conquently, if market rates increa, bond investors in the condary markets are not willing to pay as much for a claim on a given bond’s fixed interest and principal payments as they would if market rates were lower. This relationship is apparent from the inver relationship between interest rates and prent value. An increa in the discount rate (i.e., the market rate) decreas the prent value of the future cash flows.
4) Which curity has a higher effective annual interest rate?
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a. A 3-month T-bill lling at Rs 97,645 with par value Rs 100,000.
b. A coupon bond lling at par and paying a 10% coupon miannually.
Answer: a. Effective annual rate on 3-month T-bill:
()4 – 1 = 1.024124 – 1 = .10 or 10%
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b. Effective annual interest rate on coupon bond paying 5% miannually:
(1.05)2 – 1 = .1025 or 10.25%
The bond price will be lower. As time pass, the bond price, which is now above par value, will approach par.
12) Consider a bond paying a coupon rate of 10% per year miannually when the market interest rate is only 4% per half-year. The bond has 3 years until maturity.
a. Find the bond’s price today and 6 months from now after the next coupon is paid.
b. What is the total (6 month) rate of return on the bonds?
Answer: a. The bond pays $50 every 6 months. The current price is:
英语四级真题听力 [$50 ⨯Annuity factor (4%, 6)] + [$1,000 ⨯PV factor (4%, 6)] = $1,052.42
Assuming the market interest rate remains 4% per half year, price six months from now is:
[$50 ⨯Annuity factor (4%, 5)] + [$1,000 ⨯PV factor (4%, 5)] = $1,044.52
b. Rate of return
= 0.04 = 4.0% per six months
14) A bond has a current yield of 9% and a yield to maturity of 10%. Is the bond lling above or below par value? Explain.
Answer: If the yield to maturity is greater than the current yield, then the bond offers the prospect of price appreciation as it approaches its maturity date. Therefore, the bond must be lling below par value.
15) Is the coupon rate of the bond in problem 14 more or less than 9%?
Answer: The coupon rate is less than 9%. If coupon divided by price equals 9%, and price is less than par, then price divided by par is less than 9%.
Ch 15:
1) What is the relationship between forward rates and the market’s expectation of future short rates? Explain in the context of both the expectations and liquidity preference theories of the term structure of interest rates.
Answer: In general, the forward rate can be viewed as the sum of the market’s expectation of the future short rate plus a potential risk (or ‘liquidity’) premium. According to the expectations theory of the term structure of interest rates, the liquidity premium is zero so that the forward rate is equal to the market’s expectation of the future short rate. Therefore, the market’s expectation of future short rates (i.e., forward rates) can be derived from the yield curve, and there is no risk premium for longer maturities.
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The liquidity preference theory, on the other hand, specifies that the liquidity premium is positive so that the forward rate is less than the market’s expectation of the future short rate. This could result in an upward sloping term structure even if the market does not anticipate an increa in interest rates. The liquidity preference theory is bad on the assumption that the financial markets are dominated by short-term investors who demand a premium in order to be induced to invest in long maturity curities.
4) The following is a list of prices for zero-coupon bonds of various maturities. Calculate the yields to maturity of each bond and the implied quence of forward rates.
Maturity(Years) Price of Bonds
1 Rs 943.40
2 898.47
3 847.62
4 792.16
Answer:
heldMaturity | Price | YTM | Forward Rate |
1 hugged | $943.40 | 6.00% | embrace |
2 | $898.47 | 5.50% | (1.0552/1.06) – 1 = 5.0% |
3 | $847.62 | grub5.67% | (1.05673/1.0552) – 1 = 6.0% |
4 | $792.16 | 6.00%拳头英文 | (1.064/1.05673) – 1 = 7.0% |
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6) The term structure for zero-coupon bonds is currently:
Maturity(Years) YTM(%)
1 4%
2 5
3 6
Next year at this time, you expect it to be:
