Q6. Which of the following statements regarding zero-coupon bonds and spot interest rates is least accurate?

A)   Price appreciation creates all of the zero-coupon bond's return.

B)   Zero-coupon bonds have no coupons.

C)   Spot interest rates will never vary across the term structure.

Q7. An investor gathers the following information about a 3-year, annual-pay bond:

• Par value of $1,000
• Coupon of 8%
• Current price of $1,100
• 1-year spot interest rate is 5%
• 2-year spot interest rate is 6%

Using the above information, the 3-year spot rate is closest to:

A)   4.37%.

B)   8.20%.

C)   4.27%.

Q8. The 3-year spot rate is 10%, and the 4-year spot rate is 10.5%. What will the 1-year rate be 3 years from now?

A)   10.0%.

B)   12.0%.

C)   11.0%.

Q9. An analyst observes that the current 6-month T-Bill rate is 8% (4% semi-annually) and the one-year T-Bill rate is 9% (4.5% semi-annually). There is an existing 1.5-year, 9% semi-annual coupon bond selling for $990. What is the annualized 1.5-year spot rate?

A)   8.8%.

B)   9.5%.

C)   9.8%.

Q6. Which of the following statements regarding zero-coupon bonds and spot interest rates is least accurate?fficeffice" />

A)   Price appreciation creates all of the zero-coupon bond's return.

B)   Zero-coupon bonds have no coupons.

C)   Spot interest rates will never vary across the term structure.

Correct answer is C)

Zero-coupon bonds are quite special. Because zero-coupon bonds have no coupons (all of the bond’s return comes from price appreciation), investors have no uncertainty about the rate at which coupons will be invested. Spot rates are defined as interest rates used to discount a single cash flow to be received in the future.

Q7. An investor gathers the following information about a 3-year, annual-pay bond:

• Par value of $1,000
• Coupon of 8%
• Current price of $1,100
• 1-year spot interest rate is 5%
• 2-year spot interest rate is 6%

Using the above information, the 3-year spot rate is closest to:

A)   4.37%.

B)   8.20%.

C)   4.27%.

Correct answer is C)

The value of the bond is simply the present value of discounted future cash flows, using the appropriate spot rate as the discount rate for each cash flow. The coupon payment of the bond is $80 (0.08 × 1,000) and the face value is $1,000. Hence, bond price of 1,100= 80/(1.05)+ 80/(1.06)² + 1,080/(1 + 3-year spot rate)³. Using the y^x key on our calculator, we can solve for the 3-year spot rate of 4.27%.

Q8. The 3-year spot rate is 10%, and the 4-year spot rate is 10.5%. What will the 1-year rate be 3 years from now?

A)   10.0%.

B)   12.0%.

C)   11.0%.

Correct answer is B)

[(1 + Z₄)⁴ / (1 + Z₃)³] ? 1 = 12.01% = 12%.

Q9. An analyst observes that the current 6-month T-Bill rate is 8% (4% semi-annually) and the one-year T-Bill rate is 9% (4.5% semi-annually). There is an existing 1.5-year, 9% semi-annual coupon bond selling for $990. What is the annualized 1.5-year spot rate?

A)   8.8%.

B)   9.5%.

C)   9.8%.

Correct answer is C)

45 / (1.04) + 45 / (1.045)² + 1045 / (1 + Z₃)³ = 990
(1045 / 905.53 )^0.3333 ? 1 = Z₃ = 4.89%
Annualized = 9.8%.