QUESTION 3 Suppose the one-year, two-year, three-year, and four-year spot rates are determined to be 1%,...

QUESTION 3

Suppose the one-year, two-year, three-year, and four-year spot rates are determined to be 1%, 2%, 3%, and 4%, respectively. What is the yield to maturity of a four-year, 5% annual coupon paying bond?

	a.	3.467%
	b.	3.878%
	c.	3.964%

Solutions

Expert Solution

Price = coupon year 1/(1+spot rate year 1)+coupon year 2/(1+spot rate year 2)^2+coupon year 3/(1+spot rate year 3)^3+(Par value+coupon year 4)/(1+spot rate year 4)^4

=5/(1+0.01)+5/(1+0.02)^2+5/(1+0.03)^3+(100+5)/(1+0.04)^4

=104.086

K = N

Bond Price =∑ [(Annual Coupon)/(1 + YTM)^k] + Par value/(1 + YTM)^N

k=1

K =4

104.086 =∑ [(5*100/100)/(1 + YTM/100)^k] + 100/(1 + YTM/100)^4

k=1

YTM% = 3.878%

jeff jeffy answered 4 months ago

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