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4. Assume that short-term rate, r1 = 6%, and that the expected market rates, E(r 12...

4. Assume that short-term rate, r1 = 6%, and that the expected market rates,

E(r 12 ) = 7 % and E(r 23 ) = 9 % . Also assume that the unbiased expectations theory holds such that the forward rates are identical to expected spot rates.


a. What should be the current price of a 3-year, $1000 bond with a 12% coupon rate? Assume annual coupon payments.
b. What is the yield-to-maturity for this bond?

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