Assume the pure expectations hypothesis holds

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Reference no: EM132036630

1. Assume the pure expectations hypothesis holds. Which statement below is incorrect?

A. If investors believe future interest rates will increase then investors will sell long bonds and buy short bonds and the slope of the yield curve will increase at a future point in time.

B. If investors believe future interest rates will decrease then investors will buy long bonds and sell short bonds and the slope of the yield curve will decrease today.

C. The expected return, based on information today, from investing in a 4-year zero coupon bond issued by Treasury is equal to the expected return, based on information today from investing in a two-year zero coupon bond followed by another investment in a two-year zero coupon bond.

D. Investors are assumed to be risk-neutral.

E. Forward rates are equal to expected future spot rates.

2. What is the price of an Australian 90-day bill with a face value of $100 when the interest rate is 6% p.a. nominal and it is assumed that there are 365 days in a year?

A. 97.08

B. 98.54

C. 98.57

D. 99.27

E. None of the above

3. A 6% coupon bond paying interest annually has a modified duration of 10, sells for $1000, and is priced at a yield to maturity (YTM) OF 7%. If the YTM increases to 9%, the price, using the concept of duration, is predicted to decrease by

A. $186.92

B. $191.39

C. $193.24

D. $200.00

E. $207.00

4. Consider a 10-year zero-coupon bond with a face value of 100. Assume that the 10-year spot rate is 8%pa nominal. Assume that dollar duration, Macaulay Duration and Modified Duration are all positive numbers. Assuming semi-annual compounding and based on the concept of duration, which statement below is incorrect?

A. The bond has a dollar duration of 438.83.

B. The bond has a modified duration of 9.615 years.

C. The bond will increase in value by 438.83 cents if the yield curve shifts downwards by 100 basis points at all maturities.

D. The bond will increase in value by 20% if the yield curve shifts downwards by 200 basis points at all maturities.

E. The bond has a Macaulay duration of 10 years

Reference no: EM132036630

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