Below is a list of prices for zero-coupon bonds of various maturities. Maturity

Question

Below is a list of prices for zero-coupon bonds of various maturities. Maturity (Years) Price of $1,000 Par Bond (Zero-Coupon) 1 $988.00 2 888.50 3 842.30 a. An 4.5% coupon $1,000 par bond pays an annual coupon and will mature in 3 years. What should the yield to maturity on the bond be? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) Yield to maturity % b. If at the end of the first year the yield curve flattens out at 7.0%, what will be the 1-year holding-period return on the coupon bond? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) Holding-period return %

Explanation / Answer

Yield on 3-year zero coupon bond = (1000 / 842.30)^(1/3) - 1 = 5.89%

Now, the current bond price can be calculated using PV function

N = 3, PMT = 45, FV = 1000, I/Y = 5.89% => Compute PV = $962.84

A year later, N = 2, PMT = 45, FV = 1000, I/Y = 7% => Compute PV = $954.80

=> Holding Period Return = (P1 - P0 + C) / P0 = (954.8 - 962.84 + 45) / 954.80 = 3.84%

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