the prices on zero-coupon US treasury bonds were as follows

Question 13.uc.edu/webapps/assessment/take/launch.jsp?course_assessment_id=_118148_1&course_id=_135081_1&content_id=_12151325_1&step=null”>

Exactly
one year ago today (say 4/20/14), the prices on zero-coupon US treasury bonds
were as follows:

Maturity In
Years

Price

1

98

2

94

3

90

4

82

The
current (i.e., 4/20/15) prices are as follows:

Maturity In
Years

Price

1

96

2

92

3

88

4

80

a) What
was the one-year forward rate last year?

b) What
was the one-year forward rate for two years in the future last year?

c) Using
the current yield curve, what is the relationship between the forward rate and
what actually happened?

d) If
the forward rate is a prediction of the rates next year, what will a two-year
zero sell for next year?

Question 17

Consider the following data on various bonds
trading at t = 0.

Bond

Coupon
Rate

Payment
Frequency

Face
Value

Time ot Maturity

Price
at t=0
(per
$1000 face value)

A

7%

4
times a year

$1000

8
years

?

B

12%

once
a year

$1000

2
years

1100

C

0

2
times a year

$1000

5
years

700

The
prices are all ex-coupon. That is, they are the price you would pay
immediately after the coupon has been paid. Thus, when you pay that
price, you will receive the next coupon one period later.

a) What
is the yield to maturity on Bond C?

b) If
the yield curve were flat at 5 percent effective annual yield, what should the
price of Bond A equal? (Note: given all of the data
above, it may not be flat.)

c) If
in one year (i.e., at t = 1), the yield curve is flat at 6% (i.e., the yield to
maturity on zero-coupon bonds of all maturities is 6%), what will be the
holding period yield for Bond B if you bought Bond B at t = 0?

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