Assignment 9

Assignment 9

1. Do Chapter 15 Problem 15 in BKM [Hint: Treat di§erent time periods as different states] P489

2. Do Chapter 15 Problem 18 in BKM P490

3. Do Chapter 22 Problem 2 in BKM P771 4. Do Chapter 22 Problem 4 in BKM P771

5. Do Chapter 22 Problem 13 in BKM [Assume the investor is on long side of the futures contract] P772

6. Inflation-indexed and nominal perpetuities (consol bonds), whose coupon payments next period are each $100 are selling for $3,333 and $2,000 respectively.

a) What are the yields of the two bonds?

b) Assume that the two bonds have the same expected returns, so that there is no risk premium for holding the nominal perpetuity. Assume that these expected returns are constant over time and also assume that the expected ináation rate is constant over time. What is the expected ináation rate?