Two bonds have the following features:

The structure of yields is
Term Interest Rate
1 year .....6%
2 years .....7%
3 years .....8%
4 years .....9%
5 years .....10%
a) What is the valuation of each security based on the yield to maturity for a five-year bond?
b) What is the valuation based on the structure of yields?
c) Given the valuations in (b), what is each bond's yield to maturity?
d) Do the yields to maturity in (c) differ from each other and from the assumed yield to maturity in (a)?
e) Given the price of bond A in (a), what would you do?Why?

Transcribed Image Text:

Bond A Bond B Principal Coupon $1,000 5% 5 years Principal Coupon Maturity $1,000 12% 5 years