ScholarMatic: Explanation & Answer
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1.
Bond A is a discount
bond with face value of $100 and maturity of 10 years.
Suppose the yield to
maturity is currently 4%.
Over the course of the
year, prevailing yields are expected to change according to the table below:
|
Next year’s yield |
Probability |
|
3% |
0.33 |
|
4% |
0.34 |
|
5% |
0.33 |
–Calculate the expected return of bond A.
—Calculate the standard deviation for bond A
Hints: Discount bonds
pay no coupon. Next year, the maturity on bond A will be 9 years.
Answer as a
percentage, DO NOT enter a % sign. Round to two decimal places.
2.
Bond B is a discount
bond with face value of $100 and maturity of 2 years.
Suppose the yield to
maturity is currently 4%.
Over the course of the
year, prevailing yields are expected to change according to the table below:
|
Next year’s yield |
Probability |
|
3% |
0.33 |
|
4% |
0.34 |
|
5% |
0.33 |
Calculate the expected return of bond B
Calculate the standard deviation of Bond B
Hints: Discount bonds
pay no coupon. Next year, the maturity on bond B will be 1 year.
Answer as a
percentage, DO NOT enter a % sign. Round to two decimal places.
ScholarMatic: Explanation & Answer
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