Chap 13

Question 1

Spot rates

Answer 1

P = Sum of Cft /(1+st)^t

Question 2

1 yr forward rates

Answer 2

P = sum CFt/ (1+f0)(1+f1)…

Question 3

Relationship between 1 yr and r yr

Answer 3

(1+ft,r)^r = (1+ft) (1+ft+1)…

Question 4

Relationship between spot and 1 yr

Answer 4

(1+st)^t = (1+f0)(1+f1)…

Square root to get st

Question 5

Relationship between forward and spot

Answer 5

Ft-1 = (1+st)^t / (1+st-1)^t-1

Question 6

Relationship between spot and r year

Answer 6

(1+st+r)^t+r = (1+st)^t (1+ft,r)^r

Question 7

Par yield

Answer 7

100 = c(1/1+s1 +1/(1+s2)^2 …) + 100/(1+s2)^2 find c%

Question 8

Expectations theory

Answer 8

Market expectations of level of interest rates

Increase interest - decrease yield short term, increase long term

Question 9

Liquidity preference theory

Answer 9

Prefer liquid/ short term = increase price , decrease yield

Long term - cheaper increase yield

Question 10

Market segmentation theory

Answer 10

Supply and demand for bonds broken into short and long term

Price driven by supply - how many, demand - how many want to invest