In: Finance
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?
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%