The yield to maturity on 1-year zero-coupon bonds is currently 7%; the YTM on 2-year zeros is

Question:

The yield to maturity on 1-year zero-coupon bonds is currently 7%; the YTM on 2-year zeros is 8%. The Treasury plans to issue a 2-year maturity coupon bond, paying coupons once per year with a coupon rate of 9%. The face value of the bond is $100.

a. At what price will the bond sell?

b. What will the yield to maturity on the bond be?

c. If the expectations theory of the yield curve is correct, what is the market expectation of the price that the bond will sell for next year?

d. Recalculate your answer to (c) if you believe in the liquidity preference theory and you believe that the liquidity premium is 1%.

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...