Business, 17.04.2020 19:04 lionessny6301

Suppose that a one-year zero-coupon bond with $1000 face value currently sells at 94.34% of its face value, and a two-year zero-coupon bond with $1000 face value currently sells at 84.99%. You are considering purchasing a two-year treasury coupon bond with annually paid coupons. The face value of this coupon bond is $1000 and its coupon rate is 12% per year.

a. What is the price of this two-year coupon bond?
b. What is the one-year forward rate today from year one to year two implied by the zero coupon bond prices?
c. If the Expectations Theory on the term structure is accepted, what are
- the expected price of the coupon bond at the end of first year? (Hint: What is the expected short-term interest rate next year?)
- the expected holding period return on the coupon bond over the first year?
d. Will the expected holding period return be higher or lower if you accept the Liquidity Preference Hypothesis rather than the Expectations Theory? Explain why.

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Suppose that a one-year zero-coupon bond with $1000 face value currently sells at 94.34% of its face...

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