expectations hypothesis
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Solution Summary
Term structure of interest rates is depicted.
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2A
a)
The present value of any coupon bond is the present value of its coupon payments and face value. Match each cash flow with the appropriate spot rate. For the cash flow that occurs at the end of the first year, use the one-year spot rate. For the cash flow that occurs at the end of the second year, use the two-year spot rate.
P = C1 / (1+r1) + (C2+F) / (1+r¬2)2
= 60 / (1.10) + (60 + 1000) / (1.11)2
=$914.87
b)
The yield to the maturity is the discount rate, which sets the cash flows equal to the price of ...
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