The Following Information Relates to Questions 30-36
Jane Nguyen Is

question 9

Multiple Choice

The following information relates to Questions 30-36
Jane nguyen is a senior bond trader and Christine Alexander is a junior bond trader for an investment bank. nguyen is responsible for her own trading activities and also for providing assignments to Alexander that will develop her skills and create profitable trade ideas. Exhibit
1 presents the current par and spot rates.
$\begin{array}{l}\text { EXHIBIT } 1 \text { Current Par and Spot Rates }\\\begin{array} { l c c } \hline \text { Maturity } & \text { Par Rate } & \text { Spot Rate } \\\hline \text { One year } & 2.50 \% & 2.50 \% \\\text { Two years } & 2.99 \% & 3.00 \%\end{array}\end{array}$ (continued)
(Continued)
$\begin{array} { l c c } \hline \text { Maturity } & \text { Par Rate } & \text { Spot Rate } \\\hline \text { Three years } & 3.48 \% & 3.50 \% \\\text { Four years } & 3.95 \% & 4.00 \% \\\text { Five years } & 4.37 \% & \\\hline\end{array}$
Note: Par and spot rates are based on nnual-coupon sovereign bonds. nguyen gives Alexander two assignments that involve researching various questions:
Assignment 1: What is the yield to maturity of the option-free, default risk-free bond presented in Exhibit 2? Assume that the bond is held to maturity, and use the rates shown in Exhibit 1.
$\begin{array}{l}\text { EXHIBIT } 2 \text { Selected Data for } \$ 1,000 \text { Par Bond }\\\begin{array} { l c c } \hline \text { Bond Name } & \text { Maturity (T) } & \text { Coupon } \\\hline \text { Bond Z } & \text { Three years } & 6.00 \% \\\hline\end{array}\end{array}$
Note: Terms are today for a T-year loan.
Assignment 2: Assuming that the projected spot curve two years from today will be below the current forward curve, is bond Z fairly valued, undervalued, or overvalued?
After completing her assignments, Alexander asks about nguyen's current trading activ- ities. nguyen states that she has a two-year investment horizon and will purchase bond Z as part of a strategy to ride the yield curve. Exhibit 1 shows nguyen's yield curve assumptions implied by the spot rates.
-based on Exhibit 1, the market is most likely expecting:

• A) deflation.
• B) inflation.
• C) no risk premiums.

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Definitions:

Referent Power

A form of influence derived from the attractiveness and charisma of the leader, which encourages others to follow.

Desire

A strong feeling of wanting to have something or wishing for something to happen.

Manager

An individual responsible for controlling or administering all or part of a company or similar organization.

Reward Power

The capacity to offer something of value as a means to influence the behavior of others.