Reference no: EM132844301
Questions -
Q1) If a pure discount three-year bond sells for $782 and a pure discount four-year bond sells for $733, what is the expected 12-month interest rate in three years time? Both have a face value of $1000.
Q2) If 12-month interest rates are expected to be 6% in three years time, describe how investors could take advantage of the pricing in question 1. What impact would this have on interest rates?
Q3) Twelve-month interest rates for the next four years are expected to be 5%, 6%, 6.8% and 7.4% respectively. Calculate the yield to maturity on:
i) a pure discount four-year bond, and
ii) a four-year 8% annual coupon bond.
Explain why there is a difference.
4Q) An investor purchases the following debt instruments with a $1,000 face value, for $826.44 and $1,000 respectively.
i) a pure discount two-year bond, and
ii) a two-year 10% annual coupon bond
Calculate the return after two years if immediately after purchase interest rates
a) fall by 1% p.a.
b) remain constant, and
c) increase by 1'% p.a. on all maturities.
(Assume that the yield curve is flat).