Question

The yield to maturity on 1-year zero-coupon bonds is currently 8.5%; the YTM on 2-year zeros is 9.5%. The Treasury plans to issue a 2-year maturity coupon bond, paying coupons once per year with a coupon rate of 12%. The face value of the bond is $100. a. At what price will the bond sell? (Do not round interme

Answer 1

$104.47

Explanation:

As per the data given in the question,

Face value = $100

Coupon rate = 12%

Annual coupon = Coupon rate × Face value

= $100 × 12%

= $12

Price = Annual coupon ÷ coupon bond for year 1st + total value ÷ yield to maturity for second year

= $12 ÷ 1.085 + $112 ÷ 1.095^2

= $104.47

Hence, Bond will be sold in $104.47

The 1.085 and 1.095 is come from

= 1 + 8.5%

= 1.085

And,

= 1 + 9.5%

= 1.095