WHAT IS THE PROBLEM WITH THE SOLUTION GIVEN?

WHAT IS THE PROBLEM WITH THE SOLUTION GIVEN?

The current prices of three U.S. treasury bonds are as follows: Maturity Coupon Rate 1 0% 2 5% 3 6% Price $97.474 $99.59 $100.15 Assume that coupons paid yearly and all bonds have face value of $100. 0 What are the 1-, 2- and 3-year spot rates? @ What is the price of a three-year bond with a 8% annual coupon Answer 1) ly spot rate 97.47 100 (1 + y) +yi = 2.59% 2) 2y spot rate 99.59 5 1.0259 + 100 (1 + y2)2 + y2 = 2.75% 3) 3y spot rate 100.15 6 6 + 1.0259 1.02752 + 100 +y3 = 4.109% (1 + y3)3 4) Bond Price 8 8 108 B- + + 1.0259 1.02752 (1.04109) +B= $111.085