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Weseethefollowingyieldcurvefordiscount,orzero-coupon,bonds. Maturity Yield to Maturity 1 year 6% 2 years 7% 3 years 8% (a)Ifthefairpricefora4-yearannuitypaying$100peryearis$334.57,whatistheyieldtomaturityonafouryearzero-couponbond? (b)Supposethatyouwishtolockinaloaninyear2toberepaidinyear3(cashreceivedinyear2andinterestplusprincipalreturnedinyear3).Theamountoftheloanis$20Million.Whatpatternofdiscountbondholdingscouldyouusetoconstructthisloannow?Thatis,youwillbebuyingandsellingdifferentbonds.Howmanybondsofwhatmaturitywillyoubuy?Howmanybondsofwhatmaturitywillyousell? (c)Whatistheimpliedforwardratebetweenyear2andyear3?
- Weseethefollowingyieldcurvefordiscount,orzero-coupon,bonds.
| Maturity | Yield to Maturity |
| 1 year | 6% |
| 2 years | 7% |
| 3 years | 8% |
- (a)Ifthefairpricefora4-yearannuitypaying$100peryearis$334.57,whatistheyieldtomaturityonafouryearzero-couponbond?
- (b)Supposethatyouwishtolockinaloaninyear2toberepaidinyear3(cashreceivedinyear2andinterestplusprincipalreturnedinyear3).Theamountoftheloanis$20Million.Whatpatternofdiscountbondholdingscouldyouusetoconstructthisloannow?Thatis,youwillbebuyingandsellingdifferentbonds.Howmanybondsofwhatmaturitywillyoubuy?Howmanybondsofwhatmaturitywillyousell?
- (c)Whatistheimpliedforwardratebetweenyear2andyear3?
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Financial Markets and Institutions
Authors: Jeff Madura
11th Edition
1133947875, 9781305143005, 1305143000, 978-1133947875
