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