Question
You have extracted the following set of forward rates from the yield curve: f1=5%, f2=7%, f3=8%. Assume that expectations theory holds and realized rates will
You have extracted the following set of forward rates from the yield curve: f1=5%, f2=7%, f3=8%. Assume that expectations theory holds and realized rates will equal expected rates. a. Find the price of a 3-year 6% coupon bond that makes annual payments and has face value of $1000. b. Find the yield-to-maturity of a 3-year zero-coupon bond. c. If you buy the coupon bond in part a, and hold it until maturity what is the realized compound return you would earn? Compare this to the yield to maturity of the zerocoupon bond in part b. (Note: Realized compound return is the annualized holding period return. Think of it like the EAR for bonds.)
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