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Suppose that a 1-year zero-coupon bond with face value $100 currently sells at $95
Suppose that a 1-year zero-coupon bond with face value $100 currently sells at $95.11, while a 2-year zero sells at $79.52. You are considering the purchase of a 2-year-maturity bond making annual coupon payments. The face value of the bond is $100, and the coupon rate is 11% per year. a. What is the yield to maturity of the 2-year zero?(Do not round intermediate calculations. Round your answers to 3 decimal places.) Answer is complete and correct. 2-year zero Yield to Maturity 12.140 % b. What is the yield to maturity of the 2-year coupon bond? (Do not round intermediate calculations. Round your answers to 3 decimal places.) Answer is complete but not entirely correct. Yield to Maturity 2-year coupon 12.140 X % bond
Expert Solution
Answer= 11.75%
a)
Y1= (100-95.11)/95.11 = 5.14%
(1+Y2)^2=100/79.52
1+Y2= square root of 1.2575
Y2= 1.1214-1 = 12.14%
b)
F2= 11/1.0514 + 111/(1.1214)^2
= 98.73
Bond face value =100
Bond price = 98.73
coupon rate = 11%
Years = 2
Using ytm calculator we get
YTM = 11.75%
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