ADMS 3531 Chapter Notes - Chapter 13: Liquidity Preference, Yield Curve, Cash Flow

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emeraldserval33

12 Aug 2020

School

York University

Department

Administrative Studies

Course

ADMS 3531

Professor

Dale Domian

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Document Summary

Buying individual zero-coupon bonds in the strip market, then reassembling the cash flows into a coupon bond and selling the whole bond for more than the cost of pieces. Selling bond cash flows (either coupon or principal payments) as stand-alone zero-coupon bonds. Theory that forward interest rates are unbiased estimates of expected future interest rates. Rate of interest for a future period that would equate the total return of a long-term bond with that of a strategy of rolling over shorter-term bonds. The forward rate is inferred from the term structure. Theory that the forward rate exceeds expected future interest rates. Forward rate minus expected future short interest rate. A yield curve that plots yield as a function of maturity for recently issued coupon bonds selling at or near par value. A curve that shows the spot rates, the yields on zero-coupon bonds, as functions of the maturities of those bonds.

Related Questions

Suppose the Fed announced that they planned to keep short-run interest rates low for two years. This year, the 1-year USTS zero-coupon bond interest rate is i = 0.0025 and next year the interest rate on a 1 year zero coupon bond is expected to be i = 0.005. Using the Expectations Theory of the Term Structure of Interest Rates, what would the annual interest rate be on a 2 year zero coupon bond? What would the yield curve look like?

ultramarinecockroach917

The current yield curve for default-free zero-coupon bonds is as follows:

Maturity (years)	YTM
1	11.0	%
2	12.0
3	13.0

a. What are the implied one-year forward rates? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Maturity (years)	YTM		Forward Rate
1	11.0	%
2	12.0	%	%
3	13.0	%	%

b. Assume that the pure expectations hypothesis of the term structure is correct. If market expectations are accurate, what will the pure yield curve (that is, the yields to maturity on one- and two-year zero-coupon bonds) be next year?

	There will be a shift upwards in next year's curve.
	There will be a shift downwards in next year's curve.
	There will be no change in next year's curve.

c-1. If you purchase a two-year zero-coupon bond now, what is the expected total rate of return over the next year? (Hint: Compute the current and expected future prices.) Ignore taxes. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Expected total rate of return %

c-2. If you purchase a three-year zero-coupon bond now, what is the expected total rate of return over the next year? (Hint: Compute the current and expected future prices.) Ignore taxes. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Expected total rate of return %

According to the liquidity premium theory of the term structure, a flat yield curve indicates that short-term interest rates are expected to ----decline moderately in the future. Can you explain why the short term interest rate is expected to decline? What is the relationship between the yield curve and the interest rate?

skyhedgehog233

ADMS 3531 Chapter Notes - Chapter 13: Liquidity Preference, Yield Curve, Cash Flow

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