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Fins2624 Online Quiz Solutions
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Online Quiz Questions for Week 3 Topic: Term Structure Question: Assume that coupon interest is paid annually and all bonds have a face value of $100. Given the yields to maturity of the i) 1‐year 13% coupon bond, ii) 2‐year 11.5% coupon bond and iii) 3‐year 9% coupon bond are 10%, 9.5% and 9% respectively. Compute f(1,2), the interest rate of a 1‐year bond in 2 years’ time. Correct Answer: 7.88% Question: Suppose that all investors expect that interest rates on a 1‐year bond for the next 4 years will be as follows: Today interest rate for a 1‐year bond = 5% Forward rate for a 1‐year bond in 1 year = 7% Forward rate for a 1‐year bond in 2 years = 9% Forward rate for a 1‐year bond in 3 years = 10% What is the price of a 3‐year zero coupon bond with a face value of $100? Correct Answer: Question: Calculate the expected holding period return for an investor who purchases a 5.5% two‐year bond and plans to sell it after one year. The purchase price is $97.350, the expected market rate for a one year bond in one year is 7.20% and the bond pays coupon interest annually. The bond has a $100 face value. Correct Answer: Question: An investor with a one‐year investment horizon has chosen to invest in a four‐year bond. Find the expected market rate of a three‐year bond in one year if the forward rate, f(3,1), is 6.4% with a liquidity premium of 50 basis points? Correct Answer: 5.9% 6.74% $81.658

Question: Compute the spot rate for a 2‐year zero coupon bond given the i) 1‐year 9.5% coupon bond, ii) 2‐year 11% coupon bond and iii) 3‐year 10.2% coupon bond are 11.5%, 10.5% and 10% respectively. All coupon bonds pay interest annually and have a face value of $100. Correct Answer: Question: We use ____ data to study the term structure of interest rates. Correct Answer: Question: The expectations theory of the term structure of interest rates states that Correct Answer: Question:

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