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Online Quiz 2 Term Structure Q&A
Online Quiz 2 Term Structure Q&A
7.88%
Question:
Suppose that all investors expect that interest rates on a 1-year bond for the next 4 years will
be as follows:
Today interest rate for a 1-year bond = 5%
Forward rate for a 1-year bond in 1 year = 7%
Forward rate for a 1-year bond in 2 years = 9%
Forward rate for a 1-year bond in 3 years = 10%
What is the price of a 3-year zero coupon bond with a face value of $100?
$81.658
Correct Answer:
Question: Calculate the expected holding period return for an investor who purchases a 5.5%
two-year bond and plans to sell it after one year. The purchase price is $97.350, the expected
market rate for a one year bond in one year is 7.20% and the bond pays coupon interest
annually. The bond has a $100 face value.
Correct Answer:
6.74%
Question: An investor with a one-year investment horizon has chosen to invest in a four-year
bond. Find the expected market rate of a three-year bond in one year if the forward rate,
f(3,1), is 6.4% with a liquidity premium of 50 basis points?
Correct Answer:
5.9%
Question: Compute the spot rate for a 2-year zero coupon bond given the i) 1-year 9.5%
coupon bond, ii) 2-year 11% coupon bond and iii) 3-year 10.2% coupon bond are 11.5%,
10.5% and 10% respectively. All coupon bonds pay interest annually and have a face value of
$100.
Correct Answer:
10.45%
Question: We use ____ data to study the term structure of interest rates.
Correct Answer:
cross sectional
Question: The expectations theory of the term structure of interest rates states that
Correct Answer:
Question:
Calculate the expected holding period return for an investor who purchases a 7.50% two-year
bond and plans to sell it after one year. The purchase price in $102.000, the expected market
rate for a one year bond in one year is 6.25% and the bond pays coupon interest semiannually. The bond has a $100 face value. Coupons can be reinvested at 6% p.a. until the end
of the holding period.
Correct Answer: 6.57%
Question: Which of the following statements are FALSE?
Correct Answer: Under the liquidity premium theory investors would demand a liquidity
premium from a bond with a maturity that matches their investment horizon.
Question: The yield curve shows the relationship between:
Correct Answer:
10%
Correct Answer:
Response
Feedback:
In order for Macquarie Bank to earn a return on their coupon stripping they
would need to offer a yield less than 10%.