CAS Exam 9 Spring 2017, Question 9
Study guide: Exam 9
Given the following:
| Bond | Par Value | Time to Maturity (years) | Annual Coupon Rate | Current Bond Price |
|---|---|---|---|---|
| 1 | $1000 | 1 | 0% | $956.94 |
| 2 | $1000 | 2 | 4% | $981.41 |
- Coupons are paid annually.
- Assume annual compounding.
- Liquidity premium = 1.5%.
Part a (0.75 points)
Calculate the forward rate in year two.
Part b (0.75 points)
For bond 2 at time t=1, calculate the expected prices under both the expectations hypothesis and the liquidity preference theory.
No current syllabus covers this question; it is kept for the record.
Answer this question and see the worked solution