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.) Price $ 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.) Yield to maturity % 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.) Realized compound yield % If you forecast that the yield curve in 1 year will be flat at 5.0%, 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.) Holding period return %

Explanation / Answer

a. Price of bond = $50 / (1+4%) + $50 / [(1+4%) * (1+5%)] + $1,050 / [(1+4%) * (1+5%) * (1+8%)]

= $984.18

b. Price of bond = $50 / (1+YTM) + $50 / (1+YTM)2 + $1,050 / (1+YTM)3

=> $984.18 = $50 / (1+YTM) + $50 / (1+YTM)2 + $1,050 / (1+YTM)3

=> YTM = 5.59%

c. Realized coupon yield = $50 / $984.18 * 100%

= 5.08%

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