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QUESTION 3 Suppose the one-year, two-year, three-year, and four-year spot rates are determined to be 1%, 2%,...

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Finance

QUESTION 3

  1. Suppose the one-year, two-year, three-year, and four-year spotrates are determined to be 1%, 2%, 3%, and 4%, respectively. Whatis the yield to maturity of a four-year, 5% annual coupon payingbond?

a.

3.467%

b.

3.878%

c.

3.964%

Answer & Explanation Solved by verified expert
4.3 Ratings (969 Votes)

Price = coupon year 1/(1+spot rate year 1)+coupon year 2/(1+spot rate year 2)^2+coupon year 3/(1+spot rate year 3)^3+(Par value+coupon year 4)/(1+spot rate year 4)^4

=5/(1+0.01)+5/(1+0.02)^2+5/(1+0.03)^3+(100+5)/(1+0.04)^4

=104.086

                  K = N
Bond Price =? [(Annual Coupon)/(1 + YTM)^k]     +   Par value/(1 + YTM)^N
                   k=1
                  K =4
104.086 =? [(5*100/100)/(1 + YTM/100)^k]     +   100/(1 + YTM/100)^4
                   k=1
YTM% = 3.878%

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Transcribed Image Text

QUESTION 3Suppose the one-year, two-year, three-year, and four-year spotrates are determined to be 1%, 2%, 3%, and 4%, respectively. Whatis the yield to maturity of a four-year, 5% annual coupon payingbond?a.3.467%b.3.878%c.3.964%

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