Question

Yield Curve

A Zero-coupon bond due in one year is selling at 98.5% of par. A Zero-coupon bond due in two years is selling at 96%of par. Another Zero-coupon bond due in three years is selling at 93% of par.

1. What are the yields of the three bonds?
2. What are the forward rates for year 2 and for year 3?
3. Is the yield curve upward sloping, downward sloping, or flat?

Answer 1

Assuming face value of bond is 1000.

a.)

Yiield

Year

1 = 1.523%

2 = 2.062%

3 = 2.449%

b)

F 1,2 = 2.604%

F2,3 = 3.226%

C.

Upward Sloping