Please answer and show work! And please make sure your answer is correct l! T-Mo

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Please answer and show work! And please make sure your answer is correct l! T-Mobile 12:45 AM elearn.uta.edu 37% Q5. Assume that a S1,000 face value 1- year bond issued by the City of Arlington is currently trading at S980.39, and a 2-year bond issued by that city with the same face value is currently trading at S907.03 According to the Expectations Theory of the Term Structure, the price of that City's S1,000 1-year bond will be next year Hint: Please apply a discount bond valuation approach. Standard rounding applies. A) $943.71 B) $925.93 C) $857.34 D) $952.38 E) S961.17 Q6. Assume that a S1,0001- year bond issued by Apple, Inc. is currently trading at $980.39, and another $1,000 2-year bond (also issued by Apple, Inc.) is currently trading at $907.03 If a premium for holding 2-yr security relative to holding 1-yr security averages 2.5 percentage points in the market with similar risk characteristics, then according to the Theory of Liquidity Premium of the Term Structure the next year $1,000 1-year Apple's bond should go for sale at the price the primary market. in Hint: Please apply a discount bond valuation here. Standard rounding applies. A).943.71 B).925.93 C).970.87 D).930.23 E).865.33 Q7. Assume that a S1.000 face value one vear T-note is currently

Explanation / Answer

Q5:

In expectation theroy, yield on 2 year bond= yield on 1 year bond today+ yield on 1 year bond next year

Yield on 2 year bond today:

Let yield be r, then

1000/(1+r)^2 = 907.03

solving above r= 5%.

Yield on one year bond today= face value/bond price -1= 1000/980.39 -1= 2%

According to the theory,

one year bond earns 5% each year for 2 years, hence for 2 years yield= 2*5%= 10%.

one year bond today earns 2%, balance 10%-2%= 8% should be the yield on one year bond next year.

In such a case bond price= 1000/(1+8%)= 925.93

Option B. is correct

Q6:

Yield on two year bond= (yield on one year bond+yield on next year one year bond)/2 +risk premium

5%= (2%+yield on next year one year bond)/2 + 2.5%

2.5%= (2%+yield on next year one year bond)/2

5%= 2%+yield on next year one year bond

yield on next year one year bond= 3%

Price of next year 1000 bond= face value/ (1+yield on next year one year bond)= 1000/(1+3%)= 970.87

Option C. is correct

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