Consider a zero coupon bond that promises to pay $100 each year for the next three years. Suppose we observe the set of zero coupon bond prices and its yields as below Price per $1 of Face value Yield per Maturity year 1 year 0.95 5.26% 2 years 0.88 6.60% 3 years 0.80 7.72% a) What is the price of this zero coupon bond? What is its yield to maturity? b) If the observe yield on two-year zero coupon bonds falls to 6% per year, but the other rates remain unchanged. What is your estimation of the value of the three- year annuity paying $100 per year? What is its yield to maturity?
Consider a zero coupon bond that promises to pay $100 each year for the next three years. Suppose we observe the set of zero coupon bond prices and its yields as below Price per $1 of Face value Yield per Maturity year 1 year 0.95 5.26% 2 years 0.88 6.60% 3 years 0.80 7.72% a) What is the price of this zero coupon bond? What is its yield to maturity? b) If the observe yield on two-year zero coupon bonds falls to 6% per year, but the other rates remain unchanged. What is your estimation of the value of the three- year annuity paying $100 per year? What is its yield to maturity?
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
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Consider a zero coupon bond that promises to
pay $100 each year for the next three years.
Suppose we observe the set of zero coupon
bond prices and its yields as below
Yield per
Price per $1 of
Face value
Maturity
year
1 year
0.95
5.26%
2 years
0.88
6.60%
3 years
0.80
7.72%
a) What is the price of this zero coupon bond?
What is its yield to maturity?
b) If the observe yield on two-year zero coupon
bonds falls to 6% per year, but the other rates
remain unchanged. What is your estimation of
the value of the three-
year annuity paying $100 per year? What is its
yield to maturity?
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