Question

You are given the following information about two annual- coupon bonds, each with a face and redemption value of $1,000 and each 3 years in length:

- Bond A: A 3- year 6% annual coupon bond with a price of $955.57.

- Bond B: A 3- year 8% annual coupon bond with a price of $1,008.38.

Using this data, find the annual yield on a 3- year zero- coupon bond.

Answer 1

Answer:-

Given That:-

Face Value=$1,000

price=$955.57

Years to maturity=3years

pro rated discount=Face value-price=$1,000-$955.57=$44.43

Coupon return =6% $1,000=$60

Yield=(Coupon rate+Pro rated return)/[0.5(Face value+Price)=($60+$44.43)/[0.5($1,000+$955.57)=10.68%

Coupon B

Face Value =$1,000

Price=$1,008.38

Years to maturity =3 years

Pro rated discount = Face Value -Price=$1,000-$1,008.38=-$8.38

Coupon return=8%$1,000=$80

Yield = (Coupon rate +Pro rated return)/[0.5(Face value+Price)=($80-$8.38)/[0.5($1,000+$1,008.38)=7.13%