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

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    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.

    $2.19