Question

# Prices of zero-coupon bonds reveal the following pattern of forward rates: Year Forward Rate 1 6%...

 Prices of zero-coupon bonds reveal the following pattern of forward rates:
 Year Forward Rate 1 6% 2 7 3 8

 In addition to the zero-coupon bond, investors also may purchase a 3-year bond making annual payments of \$60 with par value \$1,000.

 a. What is the price of the coupon bond?(Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "\$" sign in your response.)

 Price \$

 b. What is the yield to maturity of the coupon bond? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)

 Yield to maturity %

 c. Under the expectations hypothesis, what is the expected realized compound yield of the coupon bond? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)

 Realized compound yield %

 d. If you forecast that the yield curve in 1 year will be flat at 8.0%, what is your forecast for the expected rate of return on the coupon bond for the 1-year holding period? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)

 Holding period return %

a.

 Cash Flows 60 60 1060 Forward Rate 6% 7% 8% Present value 56.60377 52.90072 865.3513 Price \$                                             974.86

b.

 YTM=[ C+((F-P)/n)] / [(F+P)/2] Where, C= Coupon Rate F= Face Value P= Price Ytm= 6.93%

c.

 Expected Compounded Yield= (1.06x1.07x1.08)-1 = 22.49%

d.

Expected Rate of return by holding bond for 1 year= (Price of bond at end of 1st year - Price of bond today + Coupon) / Price of bond today

= (964.33*-974.86+60)/974.86 = 5.08

* price of bond after 1 year

 Cash Flows 60 1060 Forward Rate 8% 8% Present value 55.55556 908.7791 Price \$ 964.33

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