Reference no: EM132426562

Total: 40 points. Show all work for full credit (annotate relevant formulae in excel, substantial penalties otherwise). Make sure your presentation is clear and staple in the order of the questions.Excel table rules apply (show no more than 1 page of repeated rows, 5-point penalty otherwise).

 

Question 1. [15 pts] Use the par yield curve below to price the cash flows given in the left-most column.Quote the price to the closest penny.

Period	Maturity (yrs)	Yield (BEY %)	CF ($)
1	0.5	0.5	10
2	1	2	20
3	1.5	3	100
4	2	4	-30
5	2.5	5	50
6	3	6	50
7	3.5	7	100
8	4	7.5	200
9	4.5	8	0
10	5	8.4	1,000

Question 2. [15 pts] Give and describe the no-arbitrage table to price a 2-year zero coupon loan 2 years from now, accounting for the actions of all parties. For concreteness sake, use the par yield curve in question 1. What is the lockable, annualized rate for such a loan?

Question 3.[10 pts] Briefly describe the expectations hypothesis, and how the liquidity preference theory accounts for the observation that the yield curve tends to be upward sloped, rather than what is predicted by the expectations hypothesis.