2. Bonds and interest rates a) What is default risk? b) What is yield to maturity? c) What is a discount bond? (10 marks

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2 Bonds And Interest Rates A What Is Default Risk B What Is Yield To Maturity C What Is A Discount Bond 10 Marks 1 (63.76 KiB) Viewed 16 times

2. Bonds and interest rates a) What is default risk? b) What is yield to maturity? c) What is a discount bond? (10 marks) (10 marks) (10 marks) d) Suppose the market interest rate is 5%. Valuate the following bonds. (i) a 3-year discount bond with a face value of £100,000 (ii) a 3-year coupon bond with a face value of £98,000 and a coupon rate of 5% (iii) Given the different face values of the two, explain the difference between your answers to part i and ii. (30 marks) e) The current expected interest rates on one-year bonds over the next five years are Year 1 Year 2 Year 3 Year 4 Year 5 Interest 5% 7% 8% 8% 9% rate (i) Assuming the expectations theory is the correct theory of the term structure. Calculate the interest rates in the term structure for maturities of one to five years and plot the yield curve. (ii) Suppose the actual term structure for maturities of one to five years are 5%, 7%, 9%, 10%, 11%. Calculate the liquidity premium in each year based on liquidity premium theory (40 marks)