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PLEASE SHOW STEPS At your favorite bond store, Bonds-R-Us, you see the following prices: 1-year $100 zero selling for $90.19 3-year 10% coupon $1000 par

PLEASE SHOW STEPS

At your favorite bond store, Bonds-R-Us, you see the following prices:

  • 1-year $100 zero selling for $90.19
  • 3-year 10% coupon $1000 par bond selling for $950
  • 2-year 10% coupon $1000 par bond selling for $1000

Assume that the pure expectations theory for the term structure of interest rates holds, no liquidity or maturity premium exists, and the bonds are equally risky.

What is 3-year rate today?

Choices:

9.95%

9.97%

10.877%

12.28%

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