Prices of zero-coupon bonds reveal the following pattern of forward rates: Year Forward Rate 1 ............5% 2

Question:

Prices of zero-coupon bonds reveal the following pattern of forward rates:

Year Forward Rate

1 ............5%

2 ............7

3 ............8

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?

b. What is the yield to maturity of the coupon bond?

c. Under the expectations hypothesis, what is the expected realized compound yield of the coupon bond?

d. If you forecast that the yield curve in 1 year will be flat at 7%, what is your forecast for the expected rate of return on the coupon bond for the 1-year holding period?

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...