Question

# The following data shows the current prices of four default free zero coupon bonds. The redemption...

The following data shows the current prices of four default free zero coupon bonds. The redemption price in each case is 100Euro.

Maturity from now (in years) 1 2 3 4

Price now 98.12 95.46 92.39 88.72

Calculate the yield to maturity and explain the zero coupon yield curve using your answer from yield calculation

YTM is the rate of return from a bond till its maturity period.

YTM of 1 year Zero coupon bond = [ Maturity after a year / Current price ] - 1

= [100 / 98.12 ] - 1

= 1.0192 - 1

= 0.0192 i.e 1.92%

YTM of 2 year Zero coupon bond = [ Maturity after a year / Current price ]1/2 - 1

= [100 / 95.46 ]1/2 - 1

= [1.0476]1/2 - 1

= 1.0235 - 1

= 0.0235 i.e 2.35%

YTM of 3 year Zero coupon bond = [ Maturity after a year / Current price ]1/3 - 1

=[100 / 92.39 ]1/3 - 1

= [1.0824]1/3 - 1

= 1.0267 - 1

= 0.0267 i.e 2.67%

YTM of 4 year Zero coupon bond = [ Maturity after a year / Current price ]1/4 - 1

=[100 / 88.72 ]1/4 - 1

= [1.1271]1/4 - 1

= 1.0304 - 1

= 0.0304 i.e 3.04%

Yield curve is graph on which Yield is plotted on one axis and time is plotted on another axis.

Year1 - 1.92%

Year2 - 2.35%

Year3 - 2.67%

Year4 - 3.04%

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