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Bond Valuation With a Non-Flat Term Structure

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Suppose you observe the following prices for zero-coupon bonds (pure discount bonds)
that have no risk of default:

Maturity Price per $1 of Face Value Yield to Maturity

1 year 0.97 3.093%

2 years 0.90

a. What should be the price of a 2-year coupon bond that pays a 6% coupon rate, assuming
coupon payments are made once a year starting one year from now?

b. Find the missing entry in the table.

c. What should be the yield to maturity of the 2-year coupon bond in Part a?

d. Why are your answers to parts b and c of this question different?

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This posting gives the solution to the given Bond Valuation question.

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Solution:

a. Present value of first year's cash flow = 6 x .97 = 5.82

Present value of second year's cash flow = ...

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