Question

The following table summarizes the prices the default-free zero coupon bonds (expressed as a percentage of the face value)

Maturity (years) 1 2 3 4 5

Price (Per face value) $ 96.47 $ 92.08 $ 87..41 $ 82.55 $ 77.48

a. compute the yield to maturity of each bond

b.Plot the zero-coupon yield curve (for the first five years)

c. Is the yield curve upward sloping or downward sloping or flat?

a. Compute the yield to maturity of each bond

Answer 1

Price = Face Value / (1+ yield)^years

a.

Face Value = 100

96.47 = 100 /(1+yield) Answer

Yield for Year1 = 3.66%

92.08 = 100 / (1+yield)^2

Yield for Year2 = 4.21% Answer

87.41 = 100 / (1+yield)^3

Yield for Year3 = 4.59% Answer

82.55 = 100 / (1+yield)^4

Yield for Year4 = 4.91% Answer

77.48 = 100 / (1+yield)^5

Yield for Year5 = 5.24% Answer

b.

c.

As depicted in yield curve, curve is upward sloping.

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