Question

# The following is a list of prices for zero-coupon bonds of various maturities. a. Calculate the...

The following is a list of prices for zero-coupon bonds of various maturities.

a. Calculate the yield to maturity for a bond with a maturity of (i) one year; (ii) two years; (iii) three years; (iv) four years. (Do not round intermediate calculations. Round your answers to two decimal places.)

 Maturity (years) Price of Bond 1 \$ 955.90 2 916.47 3 834.12 4 766.39

b. Calculate the forward rate for (i) the second year; (ii) the third year; (iii) the fourth year. (Do not round intermediate calculations. Round your answers to two decimal places.)

 Maturity (years) Price of Bond 1 \$ 955.90 2 916.47 3 834.12 4 766.39
 Maturity (years) Price of Bond 2 916.47 3 834.12 4 766.39

a) Here, we have that,

 Sl. No. Maturity years Calculation YTM i) One year [ 1000 / 955.90 ] - 1 4.61% ii) Two years [ 1000 / 916.47 ]^(1/2) - 1 4.46% iii) Three years [ 1000 / 834.12 ]^(1/3) - 1 6.23% iv) Four years [ 1000 / 766.39 ]^(1/4) - 1 6.88%

b) Here, we have that,

 Sl. No. Maturity years Calculation Forward Rate i) Second year ( 1 + 4.46% )^2 / ( 1 + 4.61%) - 1 4.31% ii) Third year ( 1 + 6.23% )^3 / ( 1 + 4.46% )^2 - 1 9.86% iii) Fourth year ( 1 + 6.88% )^4 / ( 1 + 6.23% )^3 - 1 8.85%

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