. The annual par-coupon rate on a 1-year treasury bond is 5.5%. The par-coupon o
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Question
. The annual par-coupon rate on a 1-year treasury bond is 5.5%. The par-coupon on a 2-year treasury bond is 5.8%. What is the 1-year effective yield on a 2-year zero coupon bond? (a) 5.62 % (b) 5.70 % (c) 5.81 %The answer should be C but I can't figure out how . The annual par-coupon rate on a 1-year treasury bond is 5.5%. The par-coupon on a 2-year treasury bond is 5.8%. What is the 1-year effective yield on a 2-year zero coupon bond? (a) 5.62 % (b) 5.70 % (c) 5.81 %
The answer should be C but I can't figure out how . The annual par-coupon rate on a 1-year treasury bond is 5.5%. The par-coupon on a 2-year treasury bond is 5.8%. What is the 1-year effective yield on a 2-year zero coupon bond? (a) 5.62 % (b) 5.70 % (c) 5.81 %
The answer should be C but I can't figure out how
Explanation / Answer
Given,
Coupon rate for 2 yr treasury bond = 5.8%
1 yr rate = 5.8/2 = 2.9%(0.029)
1yr effective rate = 1-(1.029)2 = 1-1.05884
= 0.5884 = 5.88%
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