Exercise 1 (4 PTS). Suppose the interest rates on one-, five and te...

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Exercise 1 (4 PTS). Suppose the interest rates on one-, five and ten-year U.S. Treasury bonds are currently 3%, 6% and 6%, respectively. Investor A chooses to hold only one-year bonds, and Investor B is indifferent between holding five-year and ten-year bonds. How can you explain the behaviour of Investors A and B?
Exercise 2 (2 PTS). If bonds of different maturities are close substitutes, their interest rates are more likely to move together." Is this statement true, false or uncertain? Explain your answer.
Exercise 3 (4 PTS). The table below shows current and expected future one-year interest rates, as well as current interest rates on multiyear bonds. Fill in your own values for X and y, and use the table to calculate the liquidity premium for each multiyear bond.
Year      One-Year Bond Rate       Multiyear Bond Rate
1                           2%                               2%
2                           5%                               4%
3                           7%                               5%
4                           x%                                 7%
5                           y%                               10%
Exercise 4 (8 PTS). Go to the St. Louis Federal Reserve FRED database, and find daily yield data on the following U.S. Treasury securities: one-month (DGS1MO). three-month (DGS3MO), six-month (DGS6MO), one-year (DGS1), two-year (DGS2). three-year (DGS3), five-year (DGS5), seven-year (DGS7), ten-year (DGS10). twenty-year (DGS20) and thirty- year (DGS30). Download the data available into a spreadsheet
a) Construct yield curves for October 31. 2016; November 7. 2016; November 14. ,2016: and November 21, 2016. Discuss your findings.
b) On December 16, 2016. the FOMC announced an increase in U.S. interest rates (the FED decided to raise the target range for the federal funds rate to % to percent": the previous level was to 1/2 percent). Construct yield curves before and after this announcement and discuss your findings. Did the announcement affect the yield curve? If yes. why? If not. why not?
a) Suppose Investor A has bought a five-year Treasury security on July 2. 2012. and will hold it until maturity on July 2. 2017 Investor B has bought a one-year Treasury security on July 2. 2012. and has rolled-over the one-year security in 2013.2014.2015 and 0016. What will the realized returns between 2012 and 2017 be for both investors? How can you explain the differences between these returns?

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1. Investor A thinks that future interest rate, beyond 1yr is much greater than what is priced in as implied in the yield of the 5 and 10yr bonds. On the other hand, Investor B thinks that interest rates between 5...

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