$($LO $6\mathrm{.}2,6\mathrm{.}3,6\mathrm{.}5)$ The Slice & Dice Investment Co$.$ needs some help understanding the intricacies of bond pricing. It

has observed the following prices for zero coupon bonds that have no risk of default:

a$.$ How much should Slice & Dice be willing to pay for a three$-$year bond that pays a $6-$percent coupon, assuming annual

coupon payments start one year from now?

b$.$ What is the yield to maturity of the three$-$year coupon bond?

c$.$ Suppose Slice & Dice purchases this coupon bond and then $"$un$-$bundles" it into its four component cash flows: three

coupon payments and the par value amount. At what price$($s$)$ can Slice & Dice resell each of the first three cash flows

$($the coupon payments$)$ today?

d$.$ The remaining cash flow $($the face value amount$)$ is a "synthetic" three$-$year, zero coupon bond. How much must this

"strip bond" be sold for if Slice & Dice is to break even on the investment?

e$.$ What is the yield to maturity on the synthetic three$-$year, zero coupon bond?

f$.$ Why are the answers for parts b and e different?The Slice & Dice Investment Co$.$ needs some help understanding the intricacies of bond pricing. It has observed the following prices for zero coupon bonds that have no risk of default:

Maturity

Price per $$1$ Face Value

$1$ year

$$0\mathrm{.}97$

$2$ years

$0\mathrm{.}90$

$3$ years

$0\mathrm{.}81$

How much should Slice & Dice be willing to pay for a three$-$year bond that pays a $6-$percent coupon, assuming annual coupon payments start one year from now?

What is the yield to maturity of the three$-$year coupon bond?

Suppose Slice & Dice purchases this coupon bond and then $$un$-$bundles$$ it into its four component cash flows: three coupon payments and the par value amount. At what price$($s$)$ can Slice & Dice resell each of the first three cash flows $($the coupon payments$)$ today?

The remaining cash flow $($the face value amount$)$ is a $$synthetic$$ three$-$year, zero coupon bond. How much must this $$strip bond$$ be sold for if Slice & Dice is to break even on the investment?

What is the yield to maturity on the synthetic three$-$year, zero coupon bond?

Why are the answers for parts b and e different