Question: PLEASE SHOW YOUR WORK. The YTM (yield to maturity) on a one-year zero-coupon bond is 5% and the YTM on a two-year zero-coupon bond is

PLEASE SHOW YOUR WORK.

The YTM (yield to maturity) on a one-year zero-coupon bond is 5% and the YTM on a two-year zero-coupon bond is 6%. The treasury is planning to issue a 2-year, annual coupon bond with a coupon rate of 7% and a face value of $1,000.

a) Compute the value of the two-year coupon bond.

b) Compute the yield to maturity of the two-year coupon bond.

c) If the liquidity preference theory is correct, what is the market expectation of the price that the two-year coupon bond will sell for in one year (from today)? Assume a liquidity premium of 1%.

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