Ask Question
BusinessBusiness
17 November, 13:24

Problem 15-11 The yield to maturity on 1-year zero-coupon bonds is currently 8.5%; the YTM on 2-year zeros is 9.5%. The Treasury plans to issue a 2-year maturity coupon bond, paying coupons once per year with a coupon rate of 11%. The face value of the bond is $100. a. At what price will the bond sell? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What will the yield to maturity on the bond be? (Do not round intermediate calculations. Round your answer to 3 decimal places.) c. If the expectations theory of the yield curve is correct, what is the market expectation of the price that the bond will sell for next year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) d. Recalculate your answer to (c) if you believe in the liquidity preference theory and you believe that the liquidity premium is 1.5%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

+4
Answers (1)
  1. 17 November, 16:47
    0
    a. At what price will the bond sell?

    $102.71

    b. What will the yield to maturity on the bond be?

    0.0952 or 9.52%

    c. If the expectations theory of the yield curve is correct, what is the market expectation of the price that the bond will sell for next year?

    $101.37

    d. Recalculate your answer to (c) if you believe in the liquidity preference theory and you believe that the liquidity premium is 1.5%.

    $102.78

    Explanation:

    current YTM for zero coupon bonds = 8.5% for 1 year bonds and 9.5% on 2 year bonds

    The Treasury plans to issue a 2-year maturity coupon bond, paying coupons once per year with a coupon rate of 11%. The face value of the bond is $100.

    bond price = PV of maturity value + PV coupons

    $100 / (1 + 9.5%) ² = $83.40 [$11 / (1 + 8.5%) ] + [$11 / (1 + 9.5%) ²] = $10.14 + $9.17 = $19.31 issue price = $83.40 + $19.40 = $102.71

    YTM = [C + (FV - PV) / n] / [ (FV + PV) / 2] = [11 + (100 - 102.71) / 2] / [ (100 + 102.71) / 2] = 0.0952 or 9.52%

    next year's price:

    $100 / (1 + 9.5%) = $91.32 $11 / (1 + 9.5%) = $10.05 total = 101.37

    next year's price if you believe in liquidity preference theory (1.5%):

    $100 / (1 + 9.5% - 1.5%) = $92.59 $11 / (1 + 9.5% - 1.5%) = $10.19 total = $102.78
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “Problem 15-11 The yield to maturity on 1-year zero-coupon bonds is currently 8.5%; the YTM on 2-year zeros is 9.5%. The Treasury plans to ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers
You Might be Interested in
If a person in custody is to be subjected to interrogation, he or she must first be informed in clear and unequivocal terms that he or she has the right to remain silent. buissness law
Answers (1)
A trial balance has total debits of $197,900 and total credits of $199700. which account may contain a transposition error
Answers (1)
Suppose equilibrium savings equals $750 billion, and equilibrium GDP equals $3,500 billion. Investment spending rises to $900 billion, and equilibrium level of real GDP increases by $500 billion.
Answers (1)
Pursuant to a plan of reorganization adopted in the current year, Summit Corporation exchanged 1,000 shares of its common stock and paid $40,000 cash for Hansen Corporation's assets with an adjusted basis of $200,000 (fair market value of $300,000)
Answers (1)
Which statement regarding competitive advantages is true? Select one: a. With an overall cost leadership strategy, firms need not be concerned with parity on differentiation. b.
Answers (1)
New Questions in Business
Which of the following is the best example of a perfectly competitive industry? a. wheat productionb. electricity productionc. steel productiond. airplane production
Answers (1)
Assume that we use a perpetual inventory system and that five identical units are purchased separately at the following four dates and costs: April 5 at $10, April 10 at $12, April 15 at $14, and April 20 at $16 April 20 $17.
Answers (1)
In Section 7, the word warranty is best defined as A) a contract between USATestPrep and its Customers. B) a guarantee of any part of the site and its contents. C) a pledge of Customer service if anything goes wrong with the site.
Answers (2)
A (n) is the issuer's written promise to pay an amount equaling the par value. The par value is paid at a specified future date. Most often, the issuer is required to make semiannual interest payments.
Answers (1)
The primary goal of the Consumer Financial Protection Bureau is: A To monitor your credit report and ensure your identity and other sensitive data has not been compromised. B To protect against abusive or deceptive debt collection purposes.
Answers (1)
Home » Business » Problem 15-11 The yield to maturity on 1-year zero-coupon bonds is currently 8.5%; the YTM on 2-year zeros is 9.5%. The Treasury plans to issue a 2-year maturity coupon bond, paying coupons once per year with a coupon rate of 11%.
Sign Up Forgot Password?