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Computation of value of the bond

Suppose the yield to maturity on a one-year zero-coupon bond is 8%. The yield to maturity on a two-year zero-coupon bond is 10%. Answer the following questions (use semi-annual compounding):

a) According to the Expectations Hypothesis, what is the expected one-year rate in the market place for year 2?

b) Consider a one-year investor who expects the yield to maturity on a one-year bond to equal 6% next year. How should this investor arrange his or her portfolio today? Assume $100 face value for the above bonds.

c) If all investors behave like the investor in (b), what will happen to the equilibrium term structure according to the Expectations Hypothesis?

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M9161616

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