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Consider the following three bonds: a one-year zero-coupon; a 2-year zero-coupon; and a 2-year bond with an annual coupon of 4%, paid annually. All three
Consider the following three bonds: a one-year zero-coupon; a 2-year zero-coupon; and a 2-year bond with an annual coupon of 4%, paid annually. All three have a face value of $1,000. The YTM on a oneyear zero-coupon bond is 1%, and the YTM on the 2 -year zero is 2%. Find prices for each of these three bonds. Find the cost of capital for the 2-year coupon bond. Compare the cost of capital on the 2-year coupon bond from (b) to the cost of capital on the zerocoupon bonds. Discuss your finding. In particular, do you think that the relation of the YTM on the 2- year coupon bond and the yields-to-maturity on the zero-coupon bonds is affected by the coupon rate
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