Homework Answers
| Let us assume present value of zero coupon bond is $100 | ||||
| Its value after 3 years would be as flollows | ||||
| Year | Beginning | Interest rate | Interest | Ending balance |
| 100 | 7% | 7 | 107 | |
| 107 | 9% | 9.63 | 116.63 | |
| 116.63 | 10% | 11.663 | 128.293 | |
| We can calculate YTM using present value formula | ||||
| FV | 128.293 | |||
| r | r | |||
| n | 3 | |||
| PV= FV/(1+r)^n | ||||
| Where, | ||||
| FV= Future Value | ||||
| PV = Present Value | ||||
| r = Interest rate | ||||
| n= periods in number | ||||
| 100= $128.293/( 1+r)^3 | ||||
| r = 6.99% | ||||
| YTM = 6.99% | ||||
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