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( LO 6 . 2 , 6 . 3 , 6 . 5 ) The Slice & Dice Investment Co . needs some help understanding

(LO 6.2,6.3,6.5) The Slice & Dice Investment Co. needs some help understanding the intricacies of bond pricing. It
has observed the following prices for zero coupon bonds that have no risk of default:
a. How much should Slice & Dice be willing to pay for a three-year bond that pays a 6-percent coupon, assuming annual
coupon payments start one year from now?
b. What is the yield to maturity of the three-year coupon bond?
c. Suppose Slice & Dice purchases this coupon bond and then "un-bundles" it into its four component cash flows: three
coupon payments and the par value amount. At what price(s) can Slice & Dice resell each of the first three cash flows
(the coupon payments) today?
d. The remaining cash flow (the face value amount) is a "synthetic" three-year, zero coupon bond. How much must this
"strip bond" be sold for if Slice & Dice is to break even on the investment?
e. What is the yield to maturity on the synthetic three-year, zero coupon bond?
f. Why are the answers for parts b and e different?The Slice & Dice Investment Co. needs some help understanding the intricacies of bond pricing. It has observed the following prices for zero coupon bonds that have no risk of default:
Maturity
Price per $1 Face Value
1 year
$0.97
2 years
0.90
3 years
0.81
How much should Slice & Dice be willing to pay for a three-year bond that pays a 6-percent coupon, assuming annual coupon payments start one year from now?
What is the yield to maturity of the three-year coupon bond?
Suppose Slice & Dice purchases this coupon bond and then un-bundles it into its four component cash flows: three coupon payments and the par value amount. At what price(s) can Slice & Dice resell each of the first three cash flows (the coupon payments) today?
The remaining cash flow (the face value amount) is a synthetic three-year, zero coupon bond. How much must this strip bond be sold for if Slice & Dice is to break even on the investment?
What is the yield to maturity on the synthetic three-year, zero coupon bond?
Why are the answers for parts b and e different
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