Question
Bond A is a zero-coupon bond that matures in 5 years at a face value of $1000. The bond is currently priced at $800. a)
Bond A is a zero-coupon bond that matures in 5 years at a face value of $1000. The bond is currently priced at $800. a) What is the yield to maturity on this bond (assuming annual compounding)? b) Assume another zero-coupon bond, with 3 years to maturity, and has the same yield to maturity as the bond in part a. What would you expect the price of the 3-year bond to be? c) Assume there is a 3-year bond that pays a 7% annual coupon. The bond has a face value of $1000 and is currently trading at $975. Would you expect the yield to maturity of this coupon bond to be greater or less than the bond in part a? What is the yield to maturity of this bond? d) Lastly, assume that the yield to maturity of the bond mentioned in part c falls to 3%. What is the new price of the bond?
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