Question

Assume that short-term rate, r1 = 6%, and that the expected market rates, and . Also assume that the unbiased expectations theory holds such that the forward rates are identical to expected spot rates.
a. What should be the current price of a 3-year, $1000 bond with a 12% coupon rate? Assume annual coupon payments.
b. What is the yield-to-maturity for this bond?

Answer 1

Answer:

The question is missing some details,however find the complete question with the underlined figures being the missing ones below:

Assume that short-term rate, r1 = 6%, and that the expected market rates

E(r 12 ) = 7 % and E(r 23 ) = 9 % . Also assume that the unbiased expectations theory holds such that the forward rates are identical to expected spot rates.

a. What should be the current price of a 3-year, $1000 bond with a 12% coupon rate? Assume annual coupon payments.

b. What is the yield-to-maturity for this bond?

a.The current price of the bond is $ 1,082.87  

b.The yield to maturity is 8.74%

Explanation:

Find detailed computations of the bond price and yield to maturity in the spreadsheet attached.

Please note that in calculating the present of the bond i.e current price ,the rate changes from year to year as given in the question.

Download xlsx