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The following yield data relates to a number of high-quality corporate bonds recorded at each of the three points in time: Yield to Maturity Maturity (years) 5 years ago 2 years ago Today 1 9
The following yield data relates to a number of high-quality corporate bonds recorded at each of the three points in time:
|
Yield to Maturity |
|||
|
Maturity (years) |
5 years ago |
2 years ago |
Today |
|
1 |
9.10% |
14.60% |
9.30% |
|
3 |
9.20% |
12.80% |
9.80% |
|
5 |
9.38% |
12.20% |
10.90% |
|
10 |
9.6% |
10.90% |
12.60% |
Required: Consider the data from 5 years ago. According to the expectations hypothesis, what approximate return did investors expect a 5-year bond to pay as of today? Hint: think of expectations as a percentage difference in returns between the present and the future.
Expert Solution
Consider the data from 5 years ago.
YTM of N1 = 5 years maturity = 9.38% = Y1
YTM of N2 = 10 years maturity = 9.6% = Y2
Hence, approximate return investors expected on a 5-year bond to pay as of today = (Y2 x N2 - Y1 x N1) / (N2 - N1) = (10 x 9.6% - 5 x 9.38%) / (10 - 5) = 9.82%
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