- Which would you rather be holding if there is a decline in interest rates: long-term bonds or short-term bonds? Why?
- Predict what will happen to interest rates if the public suddenly expects a large increase in stock prices.
- Predict what will happen to interest rates on a corporation’s bonds if the federal government guarantees that it will pay creditors if the corporation goes bankrupt. What will happen to the interest rates on government securities?
- What is the implicit forward interest rate two years from now, if a 2- year bond earns 7% and a 3- year bond earns 8%?
- Calculate the implicit forward interest rate if a 2- year bond offers 6% while a 1- year bond offers 5%.
- Assume you are dealing with zero-coupon bonds. Yields to maturity on bonds are as follows:
Bond Maturity YTM
A 1yr 11,0%
B 2yrs 12,0%
C 3yrs 11,5%
Required:
• Calculate the implied 1-yr forward rates for the starts of years 2 and 3.
• Calculate the implied forward rate on 2-yr bonds for the start of year 2.
- If expectations of the future short-term interest rates suddenly rise, what would happen to the slope of the yield curve?
- Assuming the expectations hypothesis of the term structure is correct, calculate the interest rates in the term structure for maturities of 1 to 5 years and plot the resulting yield curves for the following path of 1-year interest rates over the next 5 years:
a) 5%, 6%, 7%, 6%, 5%
b) 5%, 4%, 3%, 4%, 5%
How would your yield curves change if people preferred shorter- term bonds over longer-term bonds?