Suppose Two Zero-Coupon Bonds Are Available for Trading That Have

question 13

Multiple Choice

Suppose two zero-coupon bonds are available for trading that have face values of $100 each.Current yields are 2 percent for the two-year bond and 5 percent for the ten-year bond.As the economy is expanding,you believe that the Federal Reserve Bank will raise short-term rates by 25 basis points (or 0.25 percent) to prevent the economy from overheating.The Fed has no influence over long-term interest rates and you expect them to remain unchanged.If you set up a spread strategy and it works as conjectured,then you will make a profit of:

• A) $0.26
• B) $0.33
• C) $0.47
• D) $0.94
• E) None of these answers are correct.

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Definitions:

Par Value

The face value of a bond or stock as stated on the certificate, which is the minimum amount the security can be sold for upon initial offering.

Stated Value

The amount per share assigned by the board of directors to no-par value stock.

Per Share Value

The financial value of a single share of a company's stock, representing a fraction of the corporation's assets and earnings per share.

Market Value

The prevailing market rate at which a service or asset is available for purchase or sale.