Below is a list of prices for zero-coupon bonds of various maturities. Maturity (Years) Price of $1,000 Par Bond (Zero-Coupon) 1 $ 943.40 2 873.52 3 816.37 a. An 8.5% coupon $1,000 par bond pays an annual coupon and will mature in 3 years. What should the yield to maturity on the bond be

6.997%

Explanation:

To find the answer, we use the Yield to Maturity (YTM) for a Zero Coupon Bond:

YTM = [ (F/PV) ^1/n] - 1

Where:

F: Face/Par value (the question is telling us that the par value of a 3-year bond is $816.367)

PV: Present Value (which is the same as the price: $1,000)

n: number of periods (in this case 3 years because the coupon is annual)

Now, we plug the amounts into the formula:

YTM = [ ($1,000/$816.37) ^1/3]-1

YTM = 6.997%