3.There are three zero coupon bonds. Their prices are:1 year=$920; 2 year =$840; 3 year =$750.
Three zero coupon bonds have the face value of 1000.
To calculate YTM
Year 1
Face value = Price (1+ YTM)
1000 = 920 ( 1+ YTM)
1+ YTM = 1000/920
YTM = 1.0896-1
YTM = 0.0869 = 8.70%
Year 2
Face value = Price (1+ YTM)2
1000 = 840 ( 1+ YTM)2
(1+ YTM)2 = 1000/840
(1+YTM)2 = 1.1905
1+ YTM = 1.0911
YTM = 1.0911-1
YTM = 0.0911 = 9.11%
Year 3
Face value = Price (1+ YTM)3
1000 = 750 ( 1+ YTM)3
(1+ YTM)3 = 1000/750
(1+YTM)3 = 1.333333
1+ YTM = 1.1006
YTM = 1.1006-1
= 0.1006
= 10.06%
The answers are in the brackets. I want to know theprocess to get the answers.
***Question**** b. What are the 1 year forward rate atthe end of year 1, and the annualized forward rate between end ofyears 1 and 3? [answers: 9.52%, and 10.75%]
