Virginia Tech FIN FIN 5654 Suppose that the price of a three-year coupon bond with a 10%…
Suppose that the price of a three-year coupon bond with a 10% coupon rate (assume annual coupons) and a par value of $1000 is $1170.25. If the yield on 1- and 2-year zero coupon bonds with $100 par value are 3.5% and 3.75%, respectively, what is the yield on a 3-year zero coupon bond with $100 par value (assume no arbitrage conditions)? Plot the yield curve for the zero-coupon bonds. Is the yield on the three-year coupon bond what you would expect, given the yield curve for the zero-coupon bond? Explain briefly.
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