Chapter 7 Term Structure
5. Assume that the Pure Expectations Theory of the Term Structure is correct and that
the expected one year rates for each of the next three years are Year 1 = 5%, Year 2 =
6%, and Year 3 = 7%. Assume now that a corporate bond has a par value of $1,000,
3 years until it matures, and pays $50 in interest on an annual basis each year (you
should now be able to calculate the price of this bond – see table below). What is the
yield to maturity for this bond?
Year
Cash Flow
Yearly Rate
Present Value
1
$50
5%
2
$50
6%
3
$1050
7%
($1050)(1/1.05)(1/1.06)(1/1.07)=$881.68
Current Price =
A. 5.86%
B. 6.16%
C. 5.96%
D. 6.26%
E. 6.06%

1

Chapter 7 Term Structure
5. Assume that the Pure Expectations Theory of the Term Structure is correct and that
the expected one year rates for each of the next three years are Year 1 = 5%, Year 2 =
6%, and Year 3 = 7%. Assume now that a corporate bond has a par value of $1,000,
3 years until it matures, and pays $50 in interest on an annual basis each year (you
should now be able to calculate the price of this bond – see table below). What is the
yield to maturity for this bond?

2

Chapter 7 Term Structure
22. You plan to buy a 10-year bond that pays interest of $55 every six months and has a
maturity value of $1,000. You require a 12 percent
nominal
annual rate of return. If
you plan to hold this bond for only 5 years (you would sell it after receiving coupon
payments 1-10, and the buyer would then receive coupon payments 11-20), but
believe that the market (investors) will require a
nominal
rate of return of only 10% at
this time, then what should you be willing to pay for this bond today?

3

Chapter 7 Term Structure
22. You plan to buy a 10-year bond that pays interest of $55 every six months and has a
maturity value of $1,000. You require a 12 percent
nominal
annual rate of return. If
you plan to hold this bond for only 5 years (you would sell it after receiving coupon
payments 1-10, and the buyer would then receive coupon payments 11-20), but
believe that the market (investors) will require a
nominal
rate of return of only 10% at
this time, then what should you be willing to pay for this bond today?

4

Chapter 7 Term Structure