Question

There are three bonds trading in the market. These bonds are issued by one Energy company....

There are three bonds trading in the market. These bonds are issued by one Energy
company. The bonds are very liquid. Investors can buy or short-sell them. The following
table shows the current price of the bonds and their three-year cash flows.

Price
(Today)		 End Year End Year End Year
0 1 2 3
143 0 30 180
135 60 0 160
105 20 20 120

1. What is the YTM of each Bond?
2. What are the spot rates implied from these bonds?

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Homework Answers

Answer #1

The Yield to maturity (YTM) is theinternal rate of return on a bond if the bond is held until it matures.

It is calculated using the following formula:

Calculation of YTM of Bond A:

r= 14%

Calculation of YTM of Bond B:

r= 23%

Calculation of YTM of Bond A:

r= 18%

The implied spot rates in the given question are the current prices of the bonds, that is, 143, 135 and 105.

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