Problem 15-12 Below is a list of prices for zero-coupon bonds of various maturities. Maturity (Years) Price of $1,000 Par Bond (Zero-Coupon) 1 $ 974.85 2 882.39 3 847.70 a. A 5.6% coupon $1,000 par bond pays an annual coupon and will mature in 3 years. What should the yield to maturity on the bond be? (Round your answer to 2 decimal places.) b. If at the end of the first year the yield curve flattens out at 6.5%, what will be the 1-year holding-period return on the coupon bond? (Round your answer to 2 decimal places.)

a. 5.63%

b. 5.72%

Explanation:

to calculate YTM of zero coupon bonds:

YTM = [(face value / market value)¹/ⁿ] - 1

a. A 5.6% coupon $1,000 par bond pays an annual coupon and will mature in 3 years. What should the yield to maturity on the bond be?

the bond's current market price:

YTM = [C + (FV - PV)/n] / [(FV + PV)/2] = [56 + (1,000 - 999.22)/3] / [(1,000 + 999.22)/2] = (56 + 0.26) / 999.61 = 5.63%

b. If at the end of the first year the yield curve flattens out at 6.5%, what will be the 1-year holding-period return on the coupon bond?

the bond's current market price:

you invest $978.17 in purchasing the bond and you receive a coupon of $56, holding period return = $56 / $978.17 = 5.72%

the law, public safety, corrections, and security cluster prepares people for careers in planning, managing, and providing legal, public safety, protective services and homeland security, including professional and technical support services.

answer(c) factors of production;