Question

Name (2.5 points) An n-year zero coupon bond with par value of 1,000 was purchased for 600. An n-year 1000 par value bond with semiannual coupons of X was purchased for 850. A 3n-yea value bond with semiannual coupons of X was purchased for P. All three bon rate. r 1,000 par ds have the same yield Calculate P.

Answer 1

From zero coupon bond 1000/(1+r/2)^(2n)=600

From n year coupon bond X/(r/2)*(1-1/(1+r/2)^(2n))=850-600

=>X/(r/2)*(1-0.6)=250

=>X/(r/2)=625

Now for 3n year bond

Price=X/(r/2)*(1-1/(1+r/2)^(6n))+1000/(1+r/2)^6n=625*(1-0.6^3)+1000*0.6^3=706