Question

In: Finance

Three government bons are in issue, bonds A, B and C each bond has a par...

Three government bons are in issue, bonds A, B and C each bond has a par value of K100 and is redeemable at the par value. The following additional information ia available in respect of each bond.

Bond Maturity term Annual coupon rate Price

Bond A 1 year 3.5% K99.90

Bond B 2 years 3.75% K98.75

Bond C 3 Years 3.80 % K97.80

a) by bootstrapping the above coupon paying bonds, estimate the one year , two year and three year spot rates and state the shape of the resulting spot yield curve.

b) Calculate the yield to maturity of each of the bond B and C and discuss the relationships between the spot rates and yields to maturity for both bonds.

Solutions

Expert Solution

The spot rate is the quote at the time the bond is issued and yield to maturity is the total return on the bond that equates the bonds price and the present value of all future cash flows discounted at YTM.

Refer to below for detailed answer :


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