Structure of interest rates changes

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1. Suppose the one-year spot rate r 1= 5% and the two-year rate r 2 = 6%. At time 0 you enter into a forward contract to buy, in exactly one year from now, a one-year zero-coupon bond. Suppose that in one year from now the term structure of interest rates changes, so that a one year rate becomes 6%. Will you experience a pro?t or a loss on your forward contract?

A. No effect

B. Profit

C. Loss

D. It could go either way, impossible to tell from provided data

2. A ten-year bond with a coupon rate of 6% and a face value of $100 is priced at $98. Let the yield to maturity be denoted by y. Which of the following statements is true:

A. y = 6%

B. y < 6%

C. y > 6%

D. It could go either way, impossible to tell from provided data

3. Consider two treasury bonds, A and B. Both have 5 years to maturity, A pays a 5% coupon rate, B pays a 7% coupon rate. Which of bonds A and B has higher modi?ed duration

A. Bond A

B. Bond B

C. The same for Bond A or B

D. It could go either way, impossible to tell from provided data

4. Holding the one-year real interest rate constant, if the nominal one-year interest rate where to increase by 1%, it would imply that the in?ation rate over the same period

A. Increased

B. Decreased

C. Stayed the same

D. It could go either way, impossible to tell from provided data

Reference no: EM133070378

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