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Below are yields of risk-free zero-coupon $1,000-par-value bonds of various maturities. Maturity (years) 1 2 3 4 5 YTM 3.25% 3.50% 3.9% 4.25% Fill in

Below are yields of risk-free zero-coupon $1,000-par-value bonds of various maturities.

Maturity (years)

1

2

3

4

5

YTM

3.25%

3.50%

3.9%

4.25%

  1. Fill in the blank if market price of the five-year zero-coupon bond is 809.79.
  2. Construct yield curve using values from the table.
  3. Suppose you would like to finance a project with equity. The project is expected to deliver cash flows during the next 3 years. Which of the risk-free rates from the table above you would use to estimate projects cost of capital? Explain your choice.

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