Hey. I am having trouble with a finance question: ----------------------------------------------------------------------------------------------------------------------------------------- Consider two bonds. The first is a...

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Finance

Hey. I am having trouble with a finance question:
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Consider two bonds. The first is a 6% coupon bond with six yearsto maturity, and a yield to maturity of 4.5% annual rate,compounded semi-annually. The second bond is a 2% coupon bond withsix years to maturity and a yield to maturity of 5.0%, annual rate,compounded semi-annually.
Given the data for the first two bonds, now consider a thirdbond: a zero coupon bond with six years to maturity. Calculate theprice per $100 of face value of the zero coupon bond. Calculate theyield to maturity for the zero coupon bond. (Express the yield asannual rate, compounded semi-annually).
HINT: Use the Value Additivity principle to answer. Create asynthetic zerocoupon bond, that is, a portfolio of the 6% couponbond and the 2% coupon bond that has the same cash flows as a6-year, zero coupon bond.

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3.6 Ratings (392 Votes)

Lets call the two bonds A and B As a first step we need to determine the price of each of the two bonds We will make use of PV function of excel to determine the price Bond A Inputs of PV function are Rate YTM semi annual 45 2 225 Period nos of half years in time to maturity of 6 years 2 x 6 12 PMT Payment per period semi annual See Answer

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Hey. I am having trouble with a finance question:-----------------------------------------------------------------------------------------------------------------------------------------Consider two bonds. The first is a 6% coupon bond with six yearsto maturity, and a yield to maturity of 4.5% annual rate,compounded semi-annually. The second bond is a 2% coupon bond withsix years to maturity and a yield to maturity of 5.0%, annual rate,compounded semi-annually.Given the data for the first two bonds, now consider a thirdbond: a zero coupon bond with six years to maturity. Calculate theprice per $100 of face value of the zero coupon bond. Calculate theyield to maturity for the zero coupon bond. (Express the yield asannual rate, compounded semi-annually).HINT: Use the Value Additivity principle to answer. Create asynthetic zerocoupon bond, that is, a portfolio of the 6% couponbond and the 2% coupon bond that has the same cash flows as a6-year, zero coupon bond.