1.
Bond A is a discount bond with face value of $100 and maturity of 10 years.
Suppose the yield to maturity is currently 4%.
Over the course of the year, prevailing yields are expected to change according to the table below:
|
Next year's yield
|
Probability
|
|
3%
|
0.33
|
|
4%
|
0.34
|
|
5%
|
0.33
|
Calculate the expected return of bond A.
Calculate the standard deviation for bond A
Hints: Discount bonds pay no coupon. Next year, the maturity on bond A will be 9 years.
Answer as a percentage, DO NOT enter a % sign. Round to two decimal places.
2.
Bond B is a discount bond with face value of $100 and maturity of 2 years.
Suppose the yield to maturity is currently 4%.
Over the course of the year, prevailing yields are expected to change according to the table below:
|
Next year's yield
|
Probability
|
|
3%
|
0.33
|
|
4%
|
0.34
|
|
5%
|
0.33
|
Calculate the expected return of bond B
Calculate the standard deviation of Bond B
Hints: Discount bonds pay no coupon. Next year, the maturity on bond B will be 1 year.
Answer as a percentage, DO NOT enter a % sign. Round to two decimal places.