Ask Question
9 October, 04:44

Prices of zero-coupon bonds reveal the following pattern of forward rates: Year Forward Rate 1 5 % 2 6 3 7 In addition to the zero-coupon bond, investors also may purchase a 3-year bond making annual payments of $50 with par value $1,000. a. What is the price of the coupon bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

+2
Answers (1)
  1. 9 October, 05:08
    0
    The price of the coupon bond is $ 1,232.30

    Explanation:

    The forward rates are:

    year 1 5%

    year 2 6%

    year 3 7%

    In determining the price of the bond, we discount the coupon and the face value of the bond as below:

    price=coupon / (1+f1) + coupon / (1+f1) * (1+f2) + (coupon+face value) / (1+f1) * (1+f2) * (1+f3)

    price=50 / (1+5%) + 50 / (1+5%) * (1+6%) + 1050 / (1+5%) * (1+6%) * (1+7%) = $1,232.30

    The price of the bond using the forward rates provided is $ 1,232.30

    This implies that an increasing forward rates led to the bond been issued at a premium of $232.30 when compared to its face value of $1000 i. e $ 1,232.30-$1,000.00
Know the Answer?
Not Sure About the Answer?
Find an answer to your question 👍 “Prices of zero-coupon bonds reveal the following pattern of forward rates: Year Forward Rate 1 5 % 2 6 3 7 In addition to the zero-coupon ...” in 📗 Business if the answers seem to be not correct or there’s no answer. Try a smart search to find answers to similar questions.
Search for Other Answers