A capital goods company is considering a major factory investment, half of which is paid today, and half one year from now. The company wants to hedge its interest rate risk for financing the investment, and lock in today the interest rate for a one-year loan it expects to take in a year from now. Assume a 2-year zero-coupon bond is trading at a yield to maturity of 8% per year, and the one year spot rate today is 7%. What would be the interest rate the company can without uncertainty) agree on today for a loan it takes one year from now? A. 8.1% B. 8.9% C. 9.0% D. 9.2% E. 9.3%

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Bond Valuation

Bond valuation are the notes issued by the corporation to raise long-term funds for the business. The corporations are required to pay the interest on such liabilities at a specified rate of interest (termed as coupon rate) at specified dates which may be on semi-annual or annual basis. These interest payments may be in the form of coupons.