Question

The following is a list of prices for zero-coupon bonds of various maturities. a. Calculate the yield to maturity for a bond with a maturity of (i) one year; (ii) two years; (iii) three years; (iv) four years. (Do not round intermediate calculations. Round your answers to two decimal places.) b. Calculate the forward rate for (i) the second year; (ii) the third year; (iii) the fourth year. (Do not round intermediate calculations. Round your answers to two decimal places.) Maturity (years) Price of Bond 1 $ 910.90 2 907.97 3 828.12 4 768.49 rev: 09_11_2017_QC_CS-99538

Answer 1

Step-by-step explanation:

future value = present value (1 + y)^n

where future value = $1000

present value = price of the bond

y = yield to maturity

n = number of years to maturity

re - writing above formula

y = (future value / present value)^1/n - 1

b)

forward rate = [(1 + yn)n / (1 + yn-1)n-1] - 1

where yn = YTM of current year

yn-1 = YTM of previous year