Economics: Years to maturity / Yield-to-maturity question?

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    • #377920
      Anonymous
      Inactive

      I am tied up in a lot of things such as mid-terms, so I need help getting this done. It’s been listed as best I can.



      Given the following zero coupon yield curve for Government of Canada debt, answer the following
      questions.

      Years to maturity / Yield-to-maturity
      1 / 4%
      2 / 4.5%
      3 / 5%
      5 / 5.5%
      10 / 6%
      15 / 7%
      20 / 8%
      25 / 9%
      30 / 10%

      (a) What is implied forward rate on a 1-year bond 2 years from now?

      (b) You think that 5 years from now the difference between the yield to maturity on the 5-year and
      25-year bonds will be smaller than the difference in their implied forward yields (i.e., that the yield
      curve will flatten or invert). How would you speculate that 5 years from now the yield to maturity on
      5-year bonds will have increased relative to their implied forward yield? How would you speculate
      that 5 years from now the yield to maturity on 25-year bonds will have decreased relative to their
      implied forward yield?

      (c) A debt consolidation company offers to pay off your student loan of $ 4000 today if you agree to pay them $ 1000 one year from today and every year thereafter until 5 years from today (i.e., there will be 5 payments at years 1, 2, 3, 4, 5). Is this a good deal? HINT: Use the interest rates in the table above. Assume that the yield to maturity of the 4-year government bond is the simple average of the yields to maturity of the 3- and 5-year bonds.



      Please show your work.



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