The yield to maturity on 1-year zero-coupon bonds is, Ask an Expert

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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 12%. 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. Omit the "tiny_mce_markerquot;sign in your response.)

b. What will the yield to maturity on the bond be? (Do not round intermediate calculations. Round your answer to 3 decimal places. Omit the "%"sign in your response.)

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. Omit the "tiny_mce_markerquot; sign in your response.)

d. Recalculate your answer to (c) if you believe in the liquidity preference theory and you believe that the liquidity premium is 2.5%. (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "tiny_mce_markerquot; sign in your response.)

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M93052299

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