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Assume the​ zero-coupon yields on​ default-free securities are as summarized in the following​ table: Maturity 1...

Assume the​ zero-coupon yields on​ default-free securities are as summarized in the following​ table:

Maturity

1 year

2 years

3 years

4 years

5 years

​Zero-Coupon Yields

4.00​%

4.30​%

4.50​%

4.70​%

4.80​%

What is the price of a​ three-year, default-free security with a face value of $1,000 and an annual coupon rate of 4%​? What is the yield to maturity for this​ bond?

Solutions

Expert Solution

Price of default free zero coupon bond =Par Value/(1+1 year rate)*(1+2 year rte)*(1+3 year rate)
=1000/((1+4%)*(1+4.30%)*(1+4.50%))=882.1980

YTM of this bond =(1000/882.1980)^(1/3)-1 =4.27%

jeff jeffy answered 3 years ago
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