Question

1. The 1-year to 5-year spot rates are 3%, 3.5%, 4%, 4.5%, and 5%, respectively. Consider a 5-year, 6% annual coupon paying bond? The face value of the bond is $1,000. Which of the following statements are true?

1. The price of the bond is $1,048.45
2. The yield to maturity is 4.88%

1. i only
2. ii only
3. Both i and ii
4. None of the above

Answer 1

If yu hav a 6% bond that kost1.04845, yu get paed 5.72273% on the munee yu put up

Wen issuer bi bak the bond 5 yeers from now, him pae yu 1$ tu yer 1.04845 (loss).

5 yeers interest=6% av 1000$* 5 yeers=5*60=300$

But yu luze 48.45$ kauz yu bi abuv par.

Yu get 300-48.45=251.55$ over 5 yeers on 1048.45$ yu put up

251.55/1048.45=0.239925604

so(1+x%)^5=1.239925604

5*log10(1+x%)=log10(1.239925604)=0.09339562811259401

0.0933956/5=0.0186791256...

or bout 1.87%/yeer