Suppose we see the following prices for zero coupon bonds with maturities ranging from one to...

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Finance

Suppose we see the following prices for zero coupon bonds withmaturities ranging from one to six years:
Maturity
in Years Bond Price
1 $98.04
2 $95.18
3 $92.18
4 $89.28
5 $86.52
6 $83.90
Note: Each bond has a face value of $100
a) What do you expect the five-year spot rateto be one year from now? Please report the annualrate.
b) What is the yield-to-maturity of a six-yearcoupon bond that has a face value of $1,000 and an annual couponrate of 8%? The coupons are paid annually.
c) What is the (Macaulay’s) duration of thebond introduced in part (b)? What’s the economic meaning ofduration? How can you interpret its weights?
d) How much would the price of the bond changeif the yield increased by 1%?

Answer & Explanation Solved by verified expert

4.1 Ratings (474 Votes)

ALets find the Zero Coupon yield curve from the giveninformationFor Zero Coupon BondUsing above equation we can find Yield CurveTime to MaturitySpot See Answer

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Transcribed Image Text

Suppose we see the following prices for zero coupon bonds withmaturities ranging from one to six years:Maturityin Years Bond Price1 $98.042 $95.183 $92.184 $89.285 $86.526 $83.90Note: Each bond has a face value of $100a) What do you expect the five-year spot rateto be one year from now? Please report the annualrate.b) What is the yield-to-maturity of a six-yearcoupon bond that has a face value of $1,000 and an annual couponrate of 8%? The coupons are paid annually.c) What is the (Macaulay’s) duration of thebond introduced in part (b)? What’s the economic meaning ofduration? How can you interpret its weights?d) How much would the price of the bond changeif the yield increased by 1%?