Problem 6 to 11 Liquidity Premium Theory
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
Complete the following analysis. Do not hard code value in your calculations.
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%
Present YTM 8.0%
Expected YTM in 1 year 7.0%
Complete the following analysis. Do not hard code values in your calculations.
Expected price in 1 year
Change in price
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