Bonds A and B have 3-year maturity. Bond A has coupon rate 2% and trades at $985,76. Bond B has coupon rate 4% and trades at $1,042. A zero-coupon…

Bonds A and B have 3-year maturity. Bond A has coupon rate 2% and

trades at $985,76. Bond B has coupon rate 4% and trades at $1,042.92. A zero-coupon

bond with 1-year maturity trades at 977.52. All bonds have a face value of $1,000.

(a) [10 marks] Compute the one-year spot rate. Compute the two- and three-year

rates under the assumption that they are equal.

(b) [10 marks] Suppose that one year from today (just after bonds A and B pay the

rst coupon payments) the term structure becomes at at 2.45%. Compute the

one-year return of an investment in each of Bonds A and B. That is, the investor

buys a bond today, and sells it one year from today just after bonds A and B

pay the rst coupon payments. Compare the two returns (return of investing in

bond A to the return of investing in bond B) and explain the intuition behind the

comparison.

(c) [10 marks] Suppose that the investor holds Bonds A and B until maturity, invest-

ing the coupons at the relevant spot rates. Suppose that one year from today (just

after bonds A and B pay the rst coupon payments) theterm structure becomes

at at 2.45%. Suppose also that the term structure remains at at 2.45% until

the bonds mature. Compute the annualized three-year return of the investment

in each of the two bonds. Compare the two returns and explain the intuition

behind the comparison.

Show more

Calculate Your Essay Price
(550 words)

Approximate price: $22

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
$26
The price is based on these factors:
Academic level
Number of pages
Urgency
Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

Read more

Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.

Read more

Privacy policy

Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.

Read more

Fair-cooperation guarantee

By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.

Read more