The price of one-year, two-year, and three-year zero-coupon Treasury bond are currently $980, $860, and $780...
The price of one-year, two-year, and three-year zero-coupon Treasury bond are currently $980, $860, and $780 respectively. The government plans to issue a new three-year annual coupon bond with a coupon rate of 4%. The face value of all the bonds are $1,000. What is the fair price of the new coupon bond? (show work)
A. $1000
B. $884.80
C. $780
D. $1,040
E. $860
Homework Answers
Zero coupon bond value = M/(1+i)^n
Where
M= maturity value or face value = 1000
i = required interest rate = 4%=0.04
n= years until maturity = 3
Zero coupon bond value = 1000/(1.04)^3
= 1000/1.124864
= 888.996 (approximately 884.8)
Answer : B
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