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A set of midterm exam questions for a finance course, focusing on topics such as yield-to-maturity, forward rates, and bond pricing. Students are asked to solve problems related to calculating yield-to-maturity for various bonds, determining forward rates through bond trading, and interpreting the shape of the yield curve using the pure expectation hypothesis.
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prices than the (^) otlier. The bond with higher call prices should-have a higher yield-to-maturity. (^) F
of the bond in the EAY convention is7.245% peryear.^ r' 1,
otherWise (^) identical non-convertible bond. (^) ' T- The yield-to-maturity of a given corporate bond is 3Yo per seniester, whereas the yield-to-maturity of a comparable US Treasury bonil is 2%, per semester. Therefore, the expected holding period of
perioireturn (^) of Uuying the comfarable US Treasury bond is selling it after one semester. (^) PLII
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If the yieldto-maturity^ of a US Treasury coupon bond remains constant'over time,^ the^ bond's^ yield
payments to buy additional uriits of the bond, and holding them until the bond's maturity. (^) i T
ofcoupon bonds. 7'
higher coupon rate has the lower yield-to-maturity. (^) h,llltr (^) I TA (^) "rt Since mutual fund cash.inflows or outflows are not under the,control of mutual fund managers, the
mutual fund- T
couponpaymentifthebond'syield-to-maturitydoesnotchange. (^) f
f Coiporations can potentially take actions to benefit shareholders at the expense^ of hurting bondholders. Bond protective covenants, such as dividend and asset use restrictions, protect bondholders by mitigating the risk that corporations will^ engage in^ such^ harmful^ actions.^ f
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The price dealers quote for a US Treasury bond is always higher or equal than the price invbstors actually pay^ for the bond: the difference is called accrued^ interest.^ l;hil l-= ,F All fairly priced^ US Treasury bonds with the^ sametime,toj?lurity have the^ szime^ yield{o-maturity.^ , t-,
coupon bonds have the^ same^ investment horizon,^ they^ have^ the^ same^ expected^ holding period^ return.^ T
Static Yield Curve method indicates^ higher^ expected^ rbto-s^ for buying^ longer term bonds.^ T
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Coel ot*(lowcf^ tr'2. '^ r g) (5 points) What (^) does tlie P-ure Expectation (^) Hypothesis conjecture about forward rates?
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a). (a points) What is a forward rate? fo761,..d (^) 1l.l€S ae (^) Cales ilnl'' y;fi (^) 1*-':'dg 6llnn^ Ce(vrt'.
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I a b) (6 points) Explain in detail hciw a'bond dealer can attain (^) a forward rate'by (^) trading on zeio- coupon bonds (no calculations needed).
d)' (5^ points) The picture below shows the Ge'rman Treasury (Pure) (^) Yield Curve in two consecutive ( auyt. Oir."gurd (^) the small difference between the two consecutive days. Interpret the shape of the ) (^) .,.{ " Curve using the^ Pure^ Expectation Hypothesis^ (no^ calculations^ needed).^ -.a c-t{ f
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a) (5 points)^ [hat is the curr-ent six-year risk-free spot rate (EAY convention)?-,,
Y-=t6--toq.aol'-| fro*r-)f-l <
. -i . annual coupon^ rate of8%o^ (annual^ couporipayments)? r?r= (^) fa.u$o; r;y
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b). (5 points) What is the fair price of a US Treasury bond with F:$1,000, 3 years to maturity and
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e) (5 poiirts) (^) The market price (^) of a US Treasury coupon bond with F:$1,0O0, i year to m'aturity,
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(u:u= I^
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' a) (13^ points) Consider d 5 year 2ero-coupon bond issued by the US government. After ond year, it will be a four year bond. Forecast the one year (^) aheiad price of this borid using the methods below.
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., (^) a.1) Static Yield Curve Fl p -o Jg.o I t.ycr=^ (ffi
, a.2) Pure Expectation Hypothesis r (^) - (^ L,^
i-Y:.z:.Y )ft-t
' (^). rafl -(r*.oa) -l-l
E ,- lp ) looo-. \tfrrF (^) (t*€,"){
P.er..i ,.r^^ =^ -.O34^ -Z.l'|(t':l)^ t .Slf r^ 3Q^ +,(F1^ -^ Z.ot[o
r(upte)= :l+:+ =2rffi1 p.eni) vlz.fa
t(t-r) ="(i (^) f 1@^ p,env^)^ rfilz T- *t< ,l
( (^)! ,. q.o
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(7 points) Consider buying a 5 year zero-coupon bond'issued by the (^) US government today, and
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E(ilpR)=#H-_t
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b.2) PureExpectation,Hyp jf+
p* (^) t AZ.. r(HPR)= t4ufr-t^
E (uPR)^ = Z'1.^
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