Consider two bonds. The first is a 6% coupon bond with six years to maturity, and a yield to maturity of 4.5% annual rate, compounded semi-annually. The second bond is a 2% coupon bond with six years to maturity and a yield to maturity of 5.0%, annual rate, compounded semi-annually.

a. Draw a cash flow diagram for each bond.

b. Calculate the current price per $100 of face value for each bond.

c. Given the data for the first two bonds, now consider a third bond: a zero coupon bond with six years to maturity. Calculate the price per $100 of face value of the zero coupon bond. Calculate the yield to maturity for the zero coupon bond. (Express the yield as annual rate, compounded semi-annually).

HINT: Use the Value Additivity principle to answer part c. Create a synthetic zero- coupon bond, that is, a portfolio of the 6% coupon bond and the 2% coupon bond that has the same cash flows as a 6-year, zero coupon bond.