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Observing the Following Term Structure; a US Treasury Bond Maturing

question 22

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Observing the following term structure; a US treasury bond maturing in 1 year has a yield of 5% while US Treasury bond maturing in 2 years has a yield of 6%; what is the expected 1 year rate,1 year from now?


Definitions:

Floating Rate Bond

A bond with an interest rate that is tied to a benchmark, such as LIBOR, and can change over time.

Coupon Payment

A periodic interest payment made to bondholders during the life of a bond.

Income Bond

A type of bond that only pays interest if the issuer has sufficient earnings to cover the interest payments.

Protective Covenants

Conditions written into financial agreements that the issuer must follow, such as restrictions on issuing more debt or making capital distributions.

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