Question

$1,000 par value zero-coupon bonds (ignore liquidity premiums) Bond Years to Maturity Yield to Maturity A 1 6.00% B 2 7.50% C 3 7.99% D 4 8.49% E 5 10.70% One year from now bond C should sell for ________ (to the nearest dollar).

Answer 1

Answer:

$842

Explanation:

The computation of the One year from now bond C should sell is shown below;

But before that we have to determined the expected yield to maturity for bond C in one year :

So,  

1.0799^3 = 1.06 x (1 + r)^2

1.188 = (1 + r)^2

√1.188 = √(1 + r)^2

1.08999 = 1 + r

r = 0.08999

= 9%

Now

the yield to maturity  = (future value ÷ present value)^0.5 - 1

0.09 + 1 = ($1,000 ÷ value in 1 year)^0.5  

1.09 = ($1,000 ÷ value in 1 year)^0.5

1.09^2 = $1,000 ÷ value in 1 year

So,

value in 1 year is

= $1,000 ÷ 1.09^2

= $1,000 ÷ 1.1881

= $841.68

≈ $842