# Valuing bonds (calculating annual yield-to-maturity and fair

These are the prices for zero coupon bonds per $1,000 of face value:

Maturity Price

1 yr $951.5

2 yr $895.6

3 yr $825.4

Show all work and formulae

a) What is the annual yield-to-maturity of each bond if the yield is compounded annually? Show work and formulas

b) Consider the prices of zero coupon bonds above, what is the fair price of a coupon bond that pays a coupon of $10 at year 1, $10 at year 2, $10 at year 3 and repays the principal of $100 at year 3?

c) What is the annual yield-to-maturity of the coupon bond in b)?

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These are the prices for zero coupon bonds per $1,000 of face value:

Maturity Price

1 yr $951.50

2 yr $895.60

3 yr $825.40

Show all work and formulae

a) What is the annual yield-to-maturity of each bond if the yield is compounded annually? Show work and formulas

yield to maturity (YTM) = (face value / price) ^ (1/n)- 1

where n= years to maturity

^ means raised to the power of

Face value= $1,000

Maturity Price YTM

1 $951.50 5.10% =($1,000. / $951.5)^(1/1)-1

2 $895.60 5.67% =($1,000. / $895.6)^(1/2)-1

3 $825.40 6.61% =($1,000. / ...

#### Solution Summary

Values bonds by calculating annual yield-to-maturity and fair price.