You are holding a 3-year bond with coupon rate 10%. Coupon payments are annual and par values are 100. 

Spot rates are: 

r1 = 5%, 

r2 = 6%, 

r3 = 6.5%.

Required

(a) Determine the bond’s price and YTM.

(b) Determine as many forward rates as you can, based on the spot rates above.

(c) You would like to get a guaranteed 3-year return on your coupon bond. Explain how this can be achieved using forward rates. Which forward rates should you use? What is your guaranteed 3-year return?

Answer rating: 100% (QA)

a To determine the bonds price and yield to maturity YTM we can calculate the present value of the b... View the full answer