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Suppose that you have the following bonds: A: 1-year zero coupon bond has a YTM of 2% B: 2-year zero coupon bond has a YTM

Suppose that you have the following bonds:

A: 1-year zero coupon bond has a YTM of 2%

B: 2-year zero coupon bond has a YTM of 3%

C: 3-year zero coupon bond has a YTM of 4%

(a) If each of these bonds has a face value of $100, what are the prices of each of these bonds?

(b) What do bonds B and C imply about the interest rate in the third year?

(c) If the law of one price holds, what is the fair value of a 3-year coupon with a 10% coupon bond with a face value of $100?

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