The YTM y for a zero-coupon bond maturing n years from today is given by the equation
M=P*(1+y)n
where M is the maturity price and P is the market price of the bond
a) For 1 year bond
100 = 95.51 *(1+y)
=> y = 100/95.51 -1 =0.04701 =4.70%
For 2 year bond
100 = 91.05 *(1+y)2
=> y = (100/91.05)0.5 -1 =0.047997 =4.80%
For 3 year bond
100 = 86.38 *(1+y)3
=> y = (100/86.38)0.333 -1 =0.05002 =5.00%
For 4 year bond
100 = 81.65 *(1+y)4
=> y = (100/81.65)0.25 -1 =0.051988 =5.20%
For 5 year bond
100 = 76.51 *(1+y)5
=> y = (100/76.51)0.2 -1 =0.05501 =5.50%
b) Yield curve is the plot of Yield to Maturities against the Maturity periods as given below
c) As we can clearly see from the plot, this is an upward sloping yield curve where the interest rates are increasing for higher maturity periods.
1. The following table summarizes prices of various default-free, zero-coupon bonds (expressed as a percentage of...
4. The following table summarizes prices of various zero-coupon bonds (expressed as a percentage of face value): Maturity (years) 123 Price (per $100 face value) $95.51 $91.05 | $86.38 $81.65 | $76.51 Compute the yield to maturity for each bond.
The following table summarizes prices of various default-free zero-coupon bonds (expressed as a percentage of face value): Maturity (years) Price (per $100 face value) | 1 | 2 | 3 | 4 | 5 94.52 89.68 85.40 81.65 78.35 The yield to maturity for the four-year zero-coupon bond is closest to _ a 0.18% Ob. 10.40% Oc. 2.60% Od. 22.47% Oe.5.20%
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