Problem 4.3. The six-month and one-year zero rates are both 5% per annum. For a bond that has a life of 18 months and pays a coupon of 4% per annum (with semiannual payments and one having just been made), the yield is 5.2% per annum. What is the bond's price? What is the 18- month zero rate? All rates are quoted with semiannual compounding. Suppose the bond has a face value of $100. Its price is obtained by discounting the cash flows at 5.2%. The price is 2 2 1.026 + 102 1.0262 + 1.0262 =98.29 If the 18-month zero rate is R , we must have 2 2 102 1.025 1.025 + (1+ R/2) =98.29 which gives R=5.204%