The table below shows market prices for four zero coupon bonds with four differe

Question

The table below shows market prices for four zero coupon bonds with four different terms: one, two, three and four years. The bonds all have a face value of $1,000. Calculate the yields on the zero coupon bonds and graph the yield curve. What is the shape of the yield curve? What is the yield on the zero coupon bound with a 1-year term? % (Round the nearest integer.) What is the yield on the zero coupon bond with a 2-year term? % (Round the nearest integer.) What is the yield on the zero coupon bond with a 3-year term? % (Round the nearest integer.) What is the yield on the zero coupon bond with a 4-year term?

Explanation / Answer

Ans 2

Shape of the curve Downward sloping since the interests are faliing

Ans 1 Term Price Formula Formula YTM 1      900.90 (Face Value/Current Price of the Bond)^1/Years to Maturity-1 1000/900.9^1-1 11.0% 2      826.45 (Face Value/Current Price of the Bond)^1/Years to Maturity-1 1000/826.45^1/2-1 10.0% 3      772.18 (Face Value/Current Price of the Bond)^1/Years to Maturity-1 1000/772.18^1/3-1 9.00% 4      735.03 (Face Value/Current Price of the Bond)^1/Years to Maturity-1 1000/735.03^1/4-1 8.00%

Ans 2

Shape of the curve Downward sloping since the interests are faliing

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