Question

Prices of zero-coupon bonds reveal the following pattern of forward rates: Year Forward Rate points In addition to the zero-coupon bond, investors also may purchase a 3-year bond making annual payments of $45 with par value $1,000 eBock a. What is the price of the coupon bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Print Priceſ References 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 8.0%, what is your forecast for the expected rate of return on the coupon bond for the 1-vear holding period? (Do not round intermediate calculations. Round vour answer to 2 decimal places.)

Answer 1

1. The face value (also known as the par value) of a bond is the price at which the bond is sold to investors when first issued; it is also the price at which the bond is redeemed at maturity. So the price of coupon bond would be $ 1000
   
2. YTM would 4.50 % as the market price and face value price is same. So coupon rate is YTM rate.
   
3. Compound yield would be 4.70%. Compounding means coupon amount will not be paid but will be reinvested with principle amount.
   
4. If the expected yield is 8% in 1 year, the expected rate of return through coupon would be same which 8%.