a. Suppose that all investors expect that interest rates for the next 5 years will be as follows:

Year - 1-year forward rate

1 5.8%

2 6.4%

3 7.1%

4 7.3%

5 7.4%

i. What should the purchase price of a 2-year zero coupon bond be if it is purchased at the beginning of year 2 and has face value of GHS1,000?

ii. What would the yield to maturity be on a four-year zero-coupon bond purchased today?

iii. Calculate the price at the beginning of year 1 of a 10% annual coupon bond with face value GHS1,000 and 5 years to maturity

b. Use the following table to answer questions i and ii

Maturity YTM

1 5%

2 6%

3 7%

4 8%

i. Value a 3-year, 10% coupon bond with face value of GHS1000

ii. What is the yield-to maturity of this bond?

iii. Value a 4- year, 10% coupon bond with face value of GHS1000

iv. What is the price of a 3-year zero coupon bond