Consider the following 5 zero-coupon bonds: Determine 1- 4 year spot rates: Maturity Price Spot Rates 1 $952.38 2 $890.00 3 $816.30 4 $735.03 5
Consider the following 5 zero-coupon bonds: Determine 1- 4 year spot rates:
| Maturity | Price | Spot Rates |
| 1 | $952.38 | |
| 2 | $890.00 | |
| 3 | $816.30 | |
| 4 | $735.03 | |
| 5 | $649.93 |
a. What is the fair price for a 4-year coupon bond with 10% coupon rate?
b. What is the YTM of this bond?
c. What are the one-year (implied) forward rates for years 1 5?
d. Compute the price for the above coupon bond (the one mentioned in part a) using one-year (implied forward) rates.
e. What is the holding period return if you buy the bond now and hold it for one year, assuming that YTM of the bond remains constant?
f. What is the holding period return if you buy the bond now and hold it for two years, but as soon as you bought the bond, YTM changes to 10% and you could reinvest the coupons at that rate?
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Authors: W. Steven Albrecht, James D. Stice, Earl Kay Stice, K. Fred Skousen, Albrecht S.E.
8th Edition
0324066708, 978-0324066708
