Online Quiz Questions for Week 3

Topic: Term Structure

Question: Assume that coupon interest is paid annually and all bonds have a face value of
$100. Given the yields to maturity of the i) 1-year 13% coupon bond, ii) 2-year 11.5% coupon
bond and iii) 3-year 9% coupon bond are 10%, 9.5% and 9% respectively. Compute f(1,2), the
interest rate of a 1-year bond in 2 years time.
Correct Answer:

7.88%

Question:
Suppose that all investors expect that interest rates on a 1-year bond for the next 4 years will
be as follows:
Today interest rate for a 1-year bond = 5%
Forward rate for a 1-year bond in 1 year = 7%
Forward rate for a 1-year bond in 2 years = 9%
Forward rate for a 1-year bond in 3 years = 10%
What is the price of a 3-year zero coupon bond with a face value of $100?
$81.658
Correct Answer:
Question: Calculate the expected holding period return for an investor who purchases a 5.5%
two-year bond and plans to sell it after one year. The purchase price is $97.350, the expected
market rate for a one year bond in one year is 7.20% and the bond pays coupon interest
annually. The bond has a $100 face value.
Correct Answer:

6.74%

Question: An investor with a one-year investment horizon has chosen to invest in a four-year
bond. Find the expected market rate of a three-year bond in one year if the forward rate,
f(3,1), is 6.4% with a liquidity premium of 50 basis points?
Correct Answer:

5.9%

Question: Compute the spot rate for a 2-year zero coupon bond given the i) 1-year 9.5%
coupon bond, ii) 2-year 11% coupon bond and iii) 3-year 10.2% coupon bond are 11.5%,
10.5% and 10% respectively. All coupon bonds pay interest annually and have a face value of
$100.
Correct Answer:

10.45%

Question: We use ____ data to study the term structure of interest rates.
Correct Answer:

cross sectional

Question: The expectations theory of the term structure of interest rates states that
Correct Answer:

forward rates are market expectations of future interest rates.

Question:
Calculate the expected holding period return for an investor who purchases a 7.50% two-year
bond and plans to sell it after one year. The purchase price in $102.000, the expected market
rate for a one year bond in one year is 6.25% and the bond pays coupon interest semiannually. The bond has a $100 face value. Coupons can be reinvested at 6% p.a. until the end
of the holding period.
Correct Answer: 6.57%
Question: Which of the following statements are FALSE?
Correct Answer: Under the liquidity premium theory investors would demand a liquidity
premium from a bond with a maturity that matches their investment horizon.
Question: The yield curve shows the relationship between:
Correct Answer:

the yield on a bond and the time to maturity of the bond.

Question: Macquarie Bank purchased a large amount of Commonwealth Government Bonds

(CGB). They wish to strip and repackage the coupon interest as individual zero-coupon bonds.
According to their calculations, the term structure of interest rates suggests that the spot rate
of a 2-year zero coupon bond is 10%. You would advise Macquarie to advertise a yield of ____
on the 2-year zero coupon bond.
Selected Answer:

10%

Correct Answer:

less than 10%

Response
Feedback:

In order for Macquarie Bank to earn a return on their coupon stripping they
would need to offer a yield less than 10%.