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The following table shows the prices of a sample of Narnian Treasury strips in December 2018. Each

Question:

The following table shows the prices of a sample of Narnian Treasury strips in December 2018. Each strip makes a single payment of $1,000 at maturity.

a. Calculate the annually compounded, spot interest rate for each year.

b. Is the term structure upward- or downward-sloping or flat?

c. Would you expect the yield on a coupon bond maturing in December 2023 to be higher or lower than the yield on the 2020 strip?

Maturity .................................. Price (%)
December 2020 ..................... 90.703%
December 2021 ..................... 85.892
December 2022 ..................... 81.491
December 2023 ..................... 77.243


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...
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a The 2year spot rate is r 2 100 90703 5 1 5 The 3year spot ...View the full answer


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Bond valuation is the process of determining the worth of a bond. It is based on the present value of the bond\'s future cash flows, which include coupon payments and the return of the bond\'s face value (or \"principal\") at maturity. The discount rate used in the calculation is directly tied to prevailing interest rates, and a rise in interest rates will decrease the present value of the bond and thus lower its price. Conversely, a fall in interest rates will increase the present value of the bond and raise its price. Interest rates serve as a benchmark for determining the value of a bond, as they determine the discount rate used in the bond valuation calculation. The most commonly used measure of interest rates is the yield to maturity (YTM), which represents the internal rate of return of an investment in a bond if the investor holds the bond until maturity and receives all scheduled payments. Yield to maturity is a function of the coupon rate, the current market price of the bond, the face value of the bond, and the number of years remaining until maturity. By comparing the yield to maturity of a bond to prevailing market interest rates, an investor can assess the relative value of the bond.

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