In Figure 6.7, we saw a plot of the yield curve on stripped Treasury bonds and pointed out that bonds bonds of different maturities may sell at different yields to maturity. In principle, when we are valuing a stream of cash flows, each cash flow should be discounted by the yield appropriate to its particular maturity. Suppose the yield curve on (zero-coupon) Treasury strips is as follows:

Time to Maturity

YTM

1 year.........................4.00%

2.................................5%

3-5............................5.50%

6-10..............................6%

You wish to value a 10-year bond with a coupon rate of 10%, paid annually.

a. Set up an Excel spreadsheet to value each of the bond's annual cash flows using this table of yields. Add up the present values of the bond's 10 cash flows to obtain the bond price.

b. What is the bond's yield to maturity?

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Face value Coupon rate Time to maturity $1,000.00 10.00% 10.00 years