Consider a five-year, default-free bond with annual coupons of 8% and a face value of $1,000 and assume zero-coupon yields on default-free securities are as summarized in the following table: Maturity Zero-Coupon Yields 1 year 7.00% 2 years 7.30% 3 years 7.50% 4 years 7.70% a. What is the yield to maturity on this bond? b. If the yield to maturity on this bond increased to 8.20%, what would the new price be? a. What is the yield to maturity on this bond? The yield to maturity on this bond is 7.75 %. (Round to three decimal places.) b. If the yield to maturity on this bond increased to 8.20%, what would the new price be? 5 years 7.80%

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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### Bond Pricing and Yield Analysis

Consider a five-year, default-free bond with annual coupons of 8% and a face value of $1,000. Assume zero-coupon yields on default-free securities are as summarized in the following table:

| Maturity | 1 year | 2 years | 3 years | 4 years | 5 years |
|----------|--------|---------|---------|---------|---------|
| Zero-Coupon Yields | 7.00% | 7.30% | 7.50% | 7.70% | 7.80% |

#### Questions:
a. What is the yield to maturity on this bond?

b. If the yield to maturity on this bond increased to 8.20%, what would the new price be?

---

#### Solutions:

a. **Yield to Maturity:**
The yield to maturity on this bond is **7.75%**. (Rounded to three decimal places.)

b. **Price with Increased Yield:**
If the yield to maturity on this bond increased to 8.20%, the new price would be **$___**. (Rounded to the nearest cent.) 

Note: The blank indicates where the new price value needs to be calculated and filled in.
Transcribed Image Text:### Bond Pricing and Yield Analysis Consider a five-year, default-free bond with annual coupons of 8% and a face value of $1,000. Assume zero-coupon yields on default-free securities are as summarized in the following table: | Maturity | 1 year | 2 years | 3 years | 4 years | 5 years | |----------|--------|---------|---------|---------|---------| | Zero-Coupon Yields | 7.00% | 7.30% | 7.50% | 7.70% | 7.80% | #### Questions: a. What is the yield to maturity on this bond? b. If the yield to maturity on this bond increased to 8.20%, what would the new price be? --- #### Solutions: a. **Yield to Maturity:** The yield to maturity on this bond is **7.75%**. (Rounded to three decimal places.) b. **Price with Increased Yield:** If the yield to maturity on this bond increased to 8.20%, the new price would be **$___**. (Rounded to the nearest cent.) Note: The blank indicates where the new price value needs to be calculated and filled in.
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