Question

The table below shows market prices for four zero coupon bonds with four different​ terms: one,​ two, three and four years. The bonds all have a face value of ​$1,000.

Calculate the yields on the zero coupon bonds and graph the yield curve. What is the shape of the yield​ curve?

Zero Coupon Bond Prices
Term​ (years)	Price​ ($)
1	952.38
2	924.56
3	915.14
4	923.85

What is the yield on the zero coupon bond with a​ 1-year term? (Round to the nearest integer)

Answer 1

We know that,

Price = Face Value / (1+yield)^ years

Yield on 1-year term:

952.38 = 1000 / (1+yield)^1

yield = 5.00% Answer (yield on the zero coupon bond with a​ 1-year term)

Yield on 2-year term:

924.56 = 1000 / (1+yield)^2

yield = (1000/924.56)^(1/2) - 1

yield = 4.00%

Yield on 3-year term:

915.14 = 1000 / (1+yield)^(1/3)

yield = 3.00%

Yield on 4-year term:

923.85 = 1000 / (1+yield)^4

yield = 2.00%

Since yield is decreasing with maturity, the shape of the yield curve would be sloping downward.

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answered by: anonymous