$10$:$06$

$\mathrm{.}11$

$88$

FNCE$\_$ECON$300$v$3\_$Assign$2.$do$...$

You are given the following incomplete information on four different bonds. Assume that all these bonds have the same risk, and that any coupon payments are paid annually.

Bond #$1$: Strip bond maturing at the end of one year, with a face value of $$1000,$ currently priced at $$950,$ yield missing

Bond #$2$: Strip bond maturing at the end of two years, with a face value of $$1000,$ current price missing

Bond #$3$: $6\%$ coupon bond maturing at the end of two years, with a face value of $$1000,$ with a yield to maturity of $5\mathrm{.}5\%,$ current price missing

Bond #$4$: $7\%$ coupon bond maturing at the end of two years, with a face value of $$1000,$ current price and yield missing

Required:

a$.$ You should be able to use what you have learned about bond pricing in this lesson and the practice problems to calculate the price of Bond #$3$ and the yield to maturity of Bond #$1.$ Fill these in in the table below, displaying the price as $xxxx$.$xx and the yield as $.\%\%.$

Bond annual interest bond #$3=0\mathrm{.}06**1000=$$$60$

Current bond price #$3=\frac{60}{1\mathrm{.}055}+\frac{1060}{{1\mathrm{.}055}^2}=1009\mathrm{.}23$

Bond#$1$ yield to maturity $=\frac{1000-\frac{950}{1}}{?}(1000+\frac{950}{2})=5\mathrm{.}13\%$

b$.$ Next, use the information for Bond #$1$ and Bond #$3$ to determine the equilibrium price of Bond #$2.$

Note that the first coupon payment $($$$60)$ of Bond #$3$ occurs at the same time as the maturity of Bond #$1,$ so the value of that coupon payment has to be the same, proportionately, as Bond #$1.$ Calculate the implied value of that coupon payment. Now, by implication, the rest of Bond #$3\text{'}$s value, which you already know, must be entirely accounted for by the second payment $($$$1060)$ at maturity. Calculate the value of the second payment.

$(2$ marks$)$

Finally, note that the second payment for Bond #$3$ coincides with Bond #$2\text{'}$s only payment, so you can infer that Bond #$2\text{'}$s price, proportionately, must be the