4 Questions

Problem 6-11 Liquidity Premium Theory

3.Based on economist's forecasts and analysis, 1 year Treasury bill rates and liquidity premiums for the next four years are expected to be as follows:

R1 = 0.80%

E(2r1) = 1.95% L2 = ).07%

E(3rl)  = 2.05% L3 = 0.11%

E (4rl)  = 2.35% L4 = 0.13%

Using the liquidity premium theory, determine the current ( long- term) rates. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

8. A bond issued by Ford on May 15, 1997 is scheduled to mature on May 15, 2097. If today is November 16, 2002, what is this bond's time to maturity? ( Use 365 days a year,)

Time to maturity__________ years and _______________ months.

9. A 3.125 percent TIPS has an original reference CPI of 185.1. If the current CPI is 210.4, what is the par value and current interest payment of the TIPS? ( Do not round intermediate calculations and round your final answers to 2 decimal places,)

Interest rate                                3: 125%

Reference CPI                            185.1

Current                                        210.4

Complete the following analysis. Do not hard code value in your calculations.

Par value                 

Interest payment

10. A 6.50 percent coupon bond with ten years left to maturity is priced to offer a 8.0 percent yield to maturity. You believe that in one year ,the yield to maturity will be 7.0 percent. What is the change in price the bond will experience in dollars? ( Do not round intermediate calculations and round your final answer to 2 decimal places.)

Coupon rate                  6.50%

Maturity                            10

Present YTM                     8.0%

Expected YTM in 1 year         7.0%

Complete the following analysis. Do not hard code values in your calculations.

Current price

Expected price in 1 year

Change in price