Question

All rates are annual. The one-year zero coupon rate is 3%. The two year zero-coupon rate is 4%. The price of a two-year 3% coupon bond with the face value of $1,000 is $ …………[A}………… (accuracy to one cent) and its yield to maturity is ………{B}………………. percent (enter 3.65% as 3.65 not 0.0365, accuracy at least to two decimals):

All rates are annual. The one-year zero coupon rate is 3%. The two year zero-coupon rate is 4%. The price of a two-year 3% coupon bond with the face value of $1,000 is $ ………{A}……… (accuracy to one cent).

Answer 1

Given that,

one-year zero coupon rate r1 = 3%

two year zero-coupon rate r2 = 4%

for a two-year 3% coupon bond with the face value of $1,000

annual coupon payment = 3% of 1000 = $30

So, price of the bond = C/(1+r1) + C/(1+r2)^2 + FV/(1+r2)^2 = 30/1.03 + 30/1.04^2 + 1000/1.04^2 = $981.42

Yield to maturity can be calculated on financial calculator using following values:

FV = 1000

PMT = 30

PV = -981.42

N = 2

Compute for I/Y, we get I/Y = 3.98

So, Yield to maturity of the bond is 3.98%