Consider the following prices of zero-coupon bonds with a $100 par: ...
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Consider the following prices of zero-coupon bonds with a $100 par:
Maturity
Price of zero-coupon bond with a $100 par
One year
$95.24
$87.34
$83.96
Two years
Three years
In addition to the zero-coupon bonds above, investors may purchase a three-year coupon bond making annual coupon payments of $10 with a par value of $100.
a)What is the price the three-year coupon bond today?
b)What is the expected price of the coupon bond in part a) above in one year right after the first annual coupon payment under the pure expectations theory of term structure?
c)Calculate the expected one-year realized compound yield of an investment in the three-year coupon bond under the pure expectations theory of term structure based on your answers in parts a) and b) above.
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