. The annual par-coupon rate on a 1-year treasury bond is 5.5%. The par-coupon o
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Question
. The annual par-coupon rate on a 1-year treasury bond is 5.5%. The par-coupon on a 2-year treasury bond is 5.8%. What is the 1-year effective yield on a 2-year zero coupon bond? (a) 5.62 % (b) 5.70 % (c) 5.81 %The answer should be C but I can't figure out how . The annual par-coupon rate on a 1-year treasury bond is 5.5%. The par-coupon on a 2-year treasury bond is 5.8%. What is the 1-year effective yield on a 2-year zero coupon bond? (a) 5.62 % (b) 5.70 % (c) 5.81 %
The answer should be C but I can't figure out how . The annual par-coupon rate on a 1-year treasury bond is 5.5%. The par-coupon on a 2-year treasury bond is 5.8%. What is the 1-year effective yield on a 2-year zero coupon bond? (a) 5.62 % (b) 5.70 % (c) 5.81 %
The answer should be C but I can't figure out how
Explanation / Answer
2-year zero coupon will follow the coupon payment of 2 year Treasury bond that is 5.8%. It is the reason that 1 year effective yield or rate of return is equivalent to 5.8%.
Thus, the nearest answer is C. 5.81%.
In zero coupon bond
Price = Face value of bond / (1+R) ^2
R = effective yield
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