Suppose that a 1-year zero-coupon bond with the face value of $100 currently sells at $94.34, while a 2-year zero sells at $84.99. You are considering the purchase of a 2-year-maturity bond making annual coupon payments. The face value of the bond is $100, and the coupon rate is 12% per year.
a. What are the 1-year and 2-year spot rates?

b. What is the price of the 2-year coupon bond?

c. What is the forward rate for the second year?

d. If the expectations hypothesis is accepted, what is the expected price of the coupon bond at the end of the first year?

e. If the expectations hypothesis is accepted, what is the expected holding-period return of an investor who buys the coupon-bond and holds it for one year?

Answer rating: 100% (QA)

a To find the spot rates we can use the formula Spot Rate Face Value Bond Price 1 Number of Years 1 For the 1year spot rate Face Value 100 Bond Price ... View the full answer