Question

Suppose that a 1-year zero-coupon bond with face value $100 currently sells at $90.37, while a 2-year zero sells at $77.15. You are considering the purchase of a 2-year-maturity bond making annual coupon payments. The face value of the bond is $100, and the coupon rate is 9% per year. a. What is the yield to maturity of the 2-year zero?(Do not round intermediate calculations. Round your answers to 3 decimal places.)

Answer 1

The yield to maturity on the 2 year-zero coupon bond is 13.85% as computed in the explanation section below

Step-by-step explanation:

The yield to maturity on the 2-year-zero coupon bond can be computed using the rate formula in excel as shown thus:

=rate(nper,pmt,-pv,fv)

nper is the number of annual coupon payments which is 2

pmt is the amount of annual coupon payment which is zero since it is a zero coupon bond

pv is the current price of the bond which is $77.15

fv is the face value of the bond which is $100

=rate(2,0,-77.15,100)=13.85%