Question: For the Zero Coupon Bond 2 above that has a $1,000 maturity value and 4 years to maturity, what will be your annual compound yield

For the Zero Coupon Bond 2 above that has a $1,000 maturity value and 4 years to maturity, what will be your annual compound yield for your 4-year holding period if you hold the bond to maturity, receiving the $1000 maturity value at the end of Year 4?

Hint Recall: Annual Compound Yield = {[FV / Bonds Price] ^ 1/n} - 1

Annual Compound Yield for Bond 2 at End of Year 4 __________________

b. Suppose for the Coupon Bond 1 above that has a 3% annual coupon rate, $1,000 maturity value and 4 years to maturity, rates go down to 1% after you purchase the bond for the life of the bond, so all the coupon payments have to be reinvested at the new rate (y) of 1%. What will be your annual compound yield (ACY) if the bond is held to maturity?

Hint: Recall FV of Bond Coupons Reinvested for 4years = Coupon Payment (FVIFA y, n)

Where:

ACY ={[(FV of Coupons +Maturity Value)] / (Bonds Price)] ^1/n } - 1, where n = 4 years

Annual Compound Yield for Bond 1 at the End of Year 4 ____________

c. Explain why you didnt received your desired annual compound yield for Bond 1, but received your desired ACY for Bond 2.

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