Question: Priscilla will make a 2-year investment using two consecutive 1-year $500,000 zero coupon bonds. The maturity proceeds of the first zero coupon bond will be

Priscilla will make a 2-year investment using two consecutive 1-year $500,000 zero coupon bonds. The maturity proceeds of the first zero coupon bond will be rolled over into the second zero coupon bond. The purchase yields for the two 1-year zero coupon bonds will be 2.73% and 3.64% p.a., respectively (annual effective rates). Note that any surplus funds after one year can be invested for one year at a rate of 3.86% p.a.

a) Calculate the price of second zero coupon bond. Round your answer to four decimal places.

a.

486712.7421

b.

481417.2925

c.

482439.2127

d.

482435.3472

b) What annual rate of interest will Priscilla earn on this 2-year investment? Round your results to five decimal places.

a.

0.06477

b.

0.03188

c.

0.06500

d.

0.03199

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