Question

The price today of a one-year zero coupon bond with face value £100 is £98. The...

The price today of a one-year zero coupon bond with face value £100 is £98. The price today of a two year 5% coupon bond (annual coupon payments) with face value £100 is £103. What is the price of a two-year zero coupon bond with face value £100?

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Answer #1

We can find the YTM of zero-coupon bond with 1 year to maturity and use the same YTM to find the price of a zero-coupon bond with 2 years to maturity.

You need to use a Financial calculator to solve this problem. You can download it.

N = 1 (The Bond is 1 year to maturity)

PV = -98 (The present value of the bond is $98)

FV = 100 (The Face value of bond is $100)

CPT + I/Y = 2.0408%

Using the same YTM to find the price of 2 years zero-coupon bond

N = 2 (The Bond is 2 years to maturity)

FV = 100 (The Face value of the bond is $100)

I/Y = 2.0408%

CPT + PV = 96.04

The price of the bond is 96.04

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