Question

(a) Calculate the 3-year par yield if interest rates are given as follows:
y1 = 5%, Y2 = 5.5%, y3 = 6%.
(b) Calculate the gross redemption yield on a 2-year fixed interest security redeemable at par with annual coupon of 3.0%, assuming that
Y1 = 4%, y2 = 5%.

Answer 1

a) par yield = (1.05*1.055*1.06)^1/3 - 1

par yield = 5.55%

b)

price of the bond today = 30/1.04 + 1030/1.05*1.04 = 972.07

Cash Flows	Year
(972.07)	0
30.00	1
1,030.00	2

Use IRR function

gross redemption yield = 4.49%