FINA 475 Lecture Notes - Lecture 6: Risk Premium

49 views3 pages

ambermuskrat630

12 Oct 2017

School

USC, SC, Carolina, South Carolina

Department

Finance

Course

FINA 475

Professor

Putnam

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

Theoretical spot curve: are not observable yields in the market, represents term structure of interest rates. Par curve: need it to make the spot curve. Ust 10 year on the run, coupon = 5% 20 cash flows of 2. 50, maturity value of 100. Calculate ytm using financial calculator: 2. 405*2 = 4. 81 % If they issued a bond today, the new 10 year ust would cost 100$ and pay a 4. 8% coupon. Fill in 6 month periods in between 2 years and 5 years. Incremental yield = (longer maturity yield - shorter maturity yield)/(# of semiannual periods + 1) Week 6 page 1 (5. 6-5. 0)/(5+1) = 0. 1 , 10 basis points. The first two are real, use them to come up with more accurate estimate than numbers given for 3 and 4. Solve for z3 = 2. 88*2 = 5. 76 % Yield curves can be upward sloping (normal), flat, or inverted.

Related Questions

You plan to buy a car 3 years from now and plan to take out a 3-year car loan. Given the following yield curve and assume that the spot rates are continuous compounded, what will be the interest rate for your car loan?

Yrs to Maturity	1	2	3	4	5	6	7
% yield	4	5	6	7	8	9	10

2. Given the following treasury bonds, calculate the 18-month zero rate. Assume face value of each bond is 100 and coupons are paid semi-annually.

Bond	Yrs to Maturity	Annual coupon rate%	Bond price
A	0.5	0	98
B	1	8	98
C	1.5	9	104

Arthur plans to invest 10,000 dollars in a ten-year bond of a technology company: Face Tech. Inc. The bond offers an 8 percent annual coupon and a yield to maturity of 10 percent. He plans to sell the bond in 4 years and invest the proceeds in a 3-year default-free zero coupon bond and cash. All bonds have a face value of $1000 per unit. The yield curve for the default free zero coupon bonds is provided in the following table:

Default free zero coupon bond with face value of $1000	Yield to Maturity
1-year Bond	7%
2-year Bond	8%
3-year Bond	9%
4-year Bond	10%
5-year Bond	12%
6-year Bond	13%
7-year Bond	14%
8-year Bond	15%

(a) If Arthur can invest the coupons at an annual rate of 7 percent, and 4 years later, this coupon bond of Face Tech. Inc. can sell at a yield to maturity of 8.5%, what is his annualized holding period return on this bond?

(b) After Arthur collected his proceeds from his investments in Face Tech. Inc. 4 years later, he will use the money to purchase 8 units of a 3-year default-free zero coupon bond and put the rest in cash. What are the percentage weights in the 3-year default-free zero coupon bond and cash (out of Arthur's total proceeds), respectively? Assume that the yield curve on zero coupon bonds stays the same and you can ignore the liquidity premium.

rubywater-buffalo142

Latest yield data available for Canadian Yields are as follows. Each rown represents a zero-coupon bond. The columns represent maturity in years.

Date	1 yr	2 yr	3 yr	4 yr	5 yr	10 yr	15 yr	20 yr	25 yr	30 yr
16-04-2015	0.64%	0.54%	0.58%	0.68%	0.80%	1.42%	1.89%	2.12%	2.16%	2.12%
17-04-2015	0.66%	0.59%	0.63%	0.72%	0.84%	1.46%	1.90%	2.12%	2.15%	2.12%
20-04-2015	0.68%	0.61%	0.65%	0.75%	0.87%	1.47%	1.92%	2.13%	2.17%	2.13%
21-04-2015	0.70%	0.61%	0.65%	0.76%	0.89%	1.50%	1.94%	2.14%	2.18%	2.14%
22-04-2015	0.69%	0.63%	0.69%	0.80%	0.94%	1.55%	1.98%	2.19%	2.22%	2.18%
23-04-2015	0.69%	0.62%	0.67%	0.78%	0.91%	1.54%	1.97%	2.17%	2.21%	2.17%
24-04-2015	0.71%	0.59%	0.64%	0.74%	0.87%	1.49%	1.93%	2.14%	2.18%	2.14%
27-04-2015	0.69%	0.61%	0.65%	0.75%	0.88%	1.51%	1.95%	2.16%	2.20%	2.16%
28-04-2015	0.69%	0.64%	0.70%	0.82%	0.96%	1.61%	2.04%	2.25%	2.29%	2.25%
29-04-2015	0.70%	0.64%	0.71%	0.83%	0.98%	1.65%	2.08%	2.28%	2.32%	2.28%
30-04-2015	0.72%	0.65%	0.71%	0.84%	0.98%	1.66%	2.08%	2.27%	2.31%	2.27%

1-Use the expectations hypothesis to calculate and predict interest rates as follows:

a-If the one-year interest rate is expected to be the same as the yield curve over the next three years, what interest rate is expected on a two-year bond one year from now?

b-What interest rate is expected on a three-year bond one year from now?

c-What relationship do you find between interest rates and maturity?

d-If investors attach term premiums of 0.0025, 0.0075 and 0.0085 to the one-, two- and three- year bonds:

i-What would be the interest rate on a two-year security?

ii-What would be the interest rate on a three-year security?

iii-What is the forward rate for one-year Canada bonds one year from now?

iv-What is the adjusted forward rate for one-year Canada bonds one year out?

2-After describing the current yield curve and forecasting interest rates using both the expectations and preferred habitat and liquidity premium methods above,

a-What is your recommended minimum interest rate for the five-year fixed rate loans?

b-How would this rate be adjusted for customers that have some credit risk?

orangedonkey67

FINA 475 Lecture Notes - Lecture 6: Risk Premium

Document Summary

Get access

Related Documents

FINA 475 Lecture Notes - Lecture 5: Prepayment Of Loan, Yield Curve, Yield Spread

FINA 475 Lecture Notes - Lecture 3: Total Return, Basis Point

FINA 475 Study Guide - Midterm Guide: Libor, Fixed Income, Interest Rate Risk

Related Questions