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    Valuation of Known Cash Flows

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    Assume that all of the bonds listed in the following table are the same except for their pattern of promised cash flows over time. Prices are quoted per $1 of face value. Use the information in the table and the Law of One Price to infer the values of the missing entries. Assume that the coupon payments are annual.

    coupon rate maturity price yield to maturity

    6% 2 years 5.50%
    0 2 years
    7% 2 years
    0 1 year $0.95

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    Solution Preview

    Please see the attached file.


    Bond 1:

    n i PV PMT FV Result
    2 5.5% ? 0.06 1 PV = -1.0092

    Bond 4:

    n i PV PMT FV Result
    1 ? -0.95 0 1 i% =5.26%

    From Bond 1 and Bond 4, we can get the missing entries for the 2-year zero-coupon bond.

    We know from bond 1 that: 1.0092 = 0.06/1.055 +1.06/ ...

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