Question

Prices of zero-coupon bonds reveal the following pattern of forward rates: Year Forward Rate 6% In addition to the zero-coupon bond, investors also may purchase a 3-year bond making annual payments of $60 with par value $1,000. a. What is the price of the coupon bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Price b. What is the yield to maturity of the coupon bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Yield to maturity % c. Under the expectations hypothesis, what is the expected realized compound yield of the coupon bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Realized compound yield % d. If you forecast that the yield curve in 1 year will be flat at 8.5%, what is your forecast for the expected rate of return on the coupon bond for the 1-year holding period? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Holding period return

Answer 1

a Price S 958.49 1=60/(1+6%)+60/((1+6%)*(1+8%))+1060/((1+6%)*(1+8%)*(1+9%)) b Yield to maturity 7.66% =((1+6%)*(1+8%)*(1+9%))^(1/3)-1 c Realized compound yield 7.66% =((60*1.08*1.09+60*1.09+1060)/958.49)^(1/3)-1 d Next year bond price 964.33 =60/(1+8% +1060/(1+8%)^2 Holding period return 6.87% =(964.33-958.49+60)/958.49

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