Suppose that the price of a three-year coupon bond with a 10% coupon rate (assume annual coupons) and a par value of $1000 is $1170.25. If the yield on 1- and 2-year zero coupon bonds with $100 par value are 3.5% and 3.75%, respectively, what is the yield on a 3-year zero coupon bond with $100 par value (assume no arbitrage conditions)?Plot the yield curve for the zero-coupon bonds.

Is the yield on the three-year coupon bond what you would expect, given the yield curve for the zero-coupon bond?  Explain briefly.

Answer rating: 100% (QA)

To calculate the yield on a 3year zerocoupon bond we can use the concept of yield to maturity YTM and the prices of the 1year and 2year zerocoupon bon... View the full answer