Question: Problem 1 [25 points]: Consider the 3 coupon bonds below with annual coupon payments: Bond Maturity (years) Coupon Market Price Bond 1 1 5.00% $101.000

Problem 1 [25 points]: Consider the 3 coupon bonds below with annual coupon payments:

Bond Maturity (years) Coupon Market Price

Bond 1 1 5.00% $101.000

Bond 2 2 6.00% $103.250

Bond 3 3 6.00% $104.230

(a) Find the 1-year, 2-year, and 3-year zero rates {R(0,t), t=1,2,3}.

b) What are the 1-year, 2-year and 3-year par yields {c(n), n=1,2,3}?

(c) Suppose a 3-year bond with coupon 4.75% (annual coupon payment) is issued today. What is the fair price of the bond?

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