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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Solution Summary
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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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