CAS Exam 9 Spring 2018, Question 8
Study guide: Exam 9
Given the following pure yield curve of zero-coupon Treasuries:
| Maturity (Years) | Yield to Maturity |
|---|---|
| 1 | 7% |
| 2 | 8% |
Consider a newly issued two-year bond that has face value of $1,000 and pays coupons annually of $90 at the end of the year.
Part a (0.5 points)
Calculate the issue price of the two-year bond using the pure yield curve given above.
Part b (0.25 points)
Calculate the forward rate for the second year.
Part c (0.5 points)
Assume the expectations hypothesis is valid. Calculate the expected price of the two-year bond at the beginning of the second year.
Part d (0.75 points)
Assume the liquidity preference theory is valid and the liquidity premium is 3%. Calculate the expected price of the two-year bond at the beginning of the second year.
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