Bond  Maturity  Coupon  Price

  A       2      8%    106.0905

  B       2       6%     102.3825

Assume a two-year bond with face value 1000 and coupon rate 5%. Investors expect a 0.4% premium for one year interest and 0.1% for two year interest. The bonds are stripped to two parts: IO (interest only) and PO (principal only). PO pays the cash flow from the return of the principal (face value). What is the yield to maturity of the created PO security?