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In Elgute 67. we saw a plot of the yield curve on stripped Treasury bonds and pointed out that bonds of different maturities may sell
In Elgute 67. we saw a plot of the yield curve on stripped Treasury bonds and pointed out that bonds of different maturities may sell at different yields to maturity. In principle, when we are valuing a stream of cash flows, each cash flow should be discounted by the yield appropriate to its particular maturity. Suppose the yield curve on (zero-coupon) Treasury strips is as follows: Years to Maturity 1 2 3.5 6-10 Yield to Maturity 4.0% 5.0 5.5 6.0 You wish to value a 10-year bond with a coupon rate of 10%, paid annually o. Complete the below table to value each of the bond's annual cash flows using this table of ylelds. Add up the present values of the bond's 10 cash flows to obtain the bond price (Do not round intermediate calculations. Enter your "YTM" answers as a percent rounded to 1 decimal place and round "PV of Cash Flow" answers to 8 decimal places.) Year YTM Cash Flow from Bond PV of Cash Flow 1 2 96 5 7 8 10 cook b.What is the bond's yield to maturity? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) erences Yield to maturity c. Compare the yield to maturity of the 10 year, 10% coupon bond with that of a 10-year zero coupon bond or Treasury strip. Which is higher? 10% coupon bond Zero coupon bond
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