1) Briefly describe the implications of each of the hypotheses (expectations, liquidity and segmentation) when the yield curve is (a) upward sloping and (b) downward sloping.
2) You are considering purchase of a 10% coupon interest, 10-year bond with a par value of $1,000.
a) Use Excel to compute the price you should pay for this bond assuming semi-annual interest payments and 8% yield to maturity.
b) One year from now, you expect that the yield to maturity for this bond to be 6%. Use Excel to compute the realized compound yield during the year while assuming a reinvestment rate of 5% and semi-annual interest payments.
c) Identify and comment on the significance of each of the components of the calculated realized compound yield from results in part “b.”