Below is a list of prices for zero-coupon bonds of various maturities Price of $

Question

Below is a list of prices for zero-coupon bonds of various maturities Price of $1,000 Par Bond (Zero-Coupon) $980.60 879.89 845.10 Maturity (Years) 2 a. An 4.7% coupon $1,000 par bond pays an annual coupon and will mature in 3 years. What should the yield to maturity on the bond be? (Do not round intermediate calculations. Round your answer to2 decimal places. Omit the"%" sign in your response.) Yield to maturity 5.73 % b. If at the end of the first year the yield curve flattens out at 6.4%, what will be the 1-year holding-period return on the coupon bond? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the"%" sign in your response.) Holding-period returr

Explanation / Answer

Coupon Payment = 47

N = 3 years

Current bond price = (47 * 0.98060 + 47 * 0.87989 + 1,047 * 0.84510)

Current bond price = 972.26

Using financial calculator:

I = 5.73%

Part B

Price at end of year 1 = 47/ (1.064) + 1047/ (1.064)2

Price at end of year 1 = 44.17 + 955.11

Price at end of year 1 = 999.28

Holding Period Return = (999.28 + 47 - 972.26)/ 972.26

Holding Period Return = 7.61%

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