Question

The following three default-free bonds currently trade. Bond 1 pays 100 in one year and sells for $98:039: Bond 2 has a coupon rate of 2%, and Par Value=1000, matures in two years, and sells for $98:106: Bond 3 has a coupon rate of 5% and Par Value=1000 and matures in three years, and sells for $102:96:

Determine the set of discount factors (d1;d2;d3) to five decimal places.  Determine the term structure (z1;z2;z3) as percent to three decimal places.  Assuming no arbitrage opportunities, value Bond 4 that has coupon rate of 4%, and par value of $100, and matures in three years (three decimal places).  Based on your answer to Problem 3, compute the yield to maturity on Bond 3 to three decimal places.  Determine the two-year par yield and three-year par yield.

Answer 1

The answer is provided in the below images.

According to my opinion The par values given for Bond 2 and Bond 3 were wrong in the question. as we can see, a 2 year or 3 year bond with 1000 par having a sale value of 98.106 or 102.96 is practically and theoretically impossible because we could never find such a high yield as above 200%. so i corrected that as par values 100 instead of 1000 in the answer for Bond 2 and 3. Kindly acknowledge me if there is any mistake in my opinion about the mistake in question.

So, the problem is answered below with 100 par values.