Consider two bonds. The first is a 6% coupon bond with six years to maturity, and a yield to maturity of 4.5% annual rate, compounded semi-annually. The second bond is a 2% coupon bond with six 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 third bond: a zero coupon bond with six years to maturity. Calculate the price per $100 of face value of the zero coupon bond. Calculate the yield to maturity for the zero coupon bond. (Express the yield as annual rate, compounded semi-annually).

HINT: Use the Value Additivity principle to answer. Create a synthetic zerocoupon bond, that is, a portfolio of the 6% coupon bond and the 2% coupon bond that has the same cash flows as a 6-year, zero coupon bond.

Answer rating: 100% (QA)

Lets call the two bonds A and B As a first step we need to determine the price of each of the two bo... View the full answer