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Consider the market rates for the maturities 1, 2, and 3 years respectively in the table...

Consider the market rates for the maturities 1, 2, and 3 years respectively in the table below. What is par rate of a 3-year bond with annual payments. (Answer with two decimal accuracy)

t R(0,t)
1 2.00
2 4.00
3 6.00

Solutions

Expert Solution

Let annual coupons be c

c/1.02+c/1.04^2+(100+c)/1.06^3=100
=>c=(100-100/1.06^3)/(1/1.02+1/1.04^2+1/1.06^3)
=>c=5.84356945

Par rate=Coupon rate=5.84356945%

jeff jeffy answered 2 years ago
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