The current yield curve for default-free zero-coupon bonds is as follows:

Business

1 answer:

Vesna [10]3 years ago

3 0

Answer:

A) the implied 1 year forward rates respectively 9,8 , 11,81 and 13,83 according to the formular

Explanation:

b) pure expactations true then

1.108²/1.098 - 1 =11.81% for a two year bond

1.118²/1.108 - 1 = 12.81% for a three year bond

The answere: The will be a shift upwards in next years curve.

c) Assume a par of 1000

in the next year a two year zero coupon bond will be a year zero and sell at 1000/1.1181 = 894.37 to get the return we take divide selling prices at year zero the trading price according to ytm is 1000/1.108² =814.55

therefore expected return 894.37/814.55= 9.79%

c2 the zero coupon bond at three year zero is trading at 1000/1.1282 = 886.446 and according to the ytm the coupon is trading at 1000/13.83^3= 715.607

therefore the expected return is

785.711/715.607=9.79%

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