Answer:
Explanation:
a. If you believe that the term structure next year will be the same as today’s, calculate the return on (i) the 1-year zero and (ii) the 4-year zero.
b. Which bond provides a greater expected 1-year return? O 1-year zero-coupon bond O 4-year zero-coupon bond
The return on one year bond is = 5.2%
The price of 4 year bond today
[tex]=\frac{ 1000}{ (1.055)^4}[/tex]
Price of 4 year bond today = 807.22
If yield curves is unchanged, the bond will have 3-year maturity and price will be
[tex]=\frac{ 1000}{(1.054)^3}[/tex]
If yield curves is unchanged, the bond will have 3-year maturity and price will be = 854.04
Return
[tex]=\frac{ (854.04 - 807.22)}{807.22}[/tex]
Return = 5.8%
The longer term bond has given the higher return in this case at it's YTM fell during the holding period(4 -year)
