Prices of zero-coupon bonds reveal the following pattern of forward rates: In ad

Question

Prices of zero-coupon bonds reveal the following pattern of forward rates: In addition to the zero-coupon bond, investors also may purchase a 3-year bond making annual payments of $50 with par value $1,000. What is the price of the coupon bond? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.) What is the yield to maturity of the coupon bond? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) Under the expectations hypothesis, what is the expected realized compound yield of the coupon bond? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) If you forecast that the yield curve in 1 year will be flat at 6.0%, what is your forecast for the expected rate of return on the coupon bond for the 1-year holding period? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Explanation / Answer

ANSWER a

PRICE OF A BOND => 50 * PVIAF@7%, 3 YEARS +1000 AF @7% FOR 3RD YEAR.

=> 50* 2.62 + 1000 * 0.816

PRICE OF A BOND => $ 947

ANSWER b

YTM => [ 50 + ( 1000 - 947 ) / 3 ]/ ( 1000 +947 ) /2

=> 6.95%

YTM => 6.95%

ANSWER c

COUPON YEILD => 50 / 947

=> 5.28%

COUPON YEILD => 5.28%

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