Question

You have a treasury bond that pays $100 one year from today and $1,100 two years from today. You notice that the yield-to-maturity on a one year-zero coupon treasury bond is 1\%1% and the yield-to-maturity on a two year-zero coupon treasury bond is 2\%2%. What should the price of your bond be

Answer 1

Step-by-step explanation:

Formula to be used:

Zero Coupon Bond Price = P/(1+i)^n

P- payment at maturity

Bond Price, 1 year Maturity Bond:

= 100/(1+0.01)^1

= 100/(1.01)^1 = 99.01

Bond Price, 2 year Maturity Bond:

= 1100/(1+0.02)^2

= 1057.29

Answer 2

Given data,

YTM on one year ZCB = 1%

YTM on two year ZCB = 2%

Maturity value of one year ZCB = 100

Maturity value of two year ZCB = 1100

Price of bond = Maturity Value / (1+YTM)n

Therefore,

Price of 1 year ZCB

Price of 1 year ZCB =
`100 / (1 + 0.01)^(1)`

Price of 1 year ZCB = 99

Price of 2 year ZCB

Price of 2 year ZCB =
`1100 / (1 + 0.02)^(2)`

Price of 2 year ZCB =1057.29

Price of 1 year ZCB = 99

Price of 2 year ZCB = 1057.29