Home The YTM (yield to maturity) on

The YTM (yield to maturity) on

The YTM (yield to maturity) on a one-year zero-coupon bond is 5%and the YTM on a two-year zero-coupon bond is 6%. The treasury isplanning to issue a 2-year, annual coupon bond with a coupon rateof 7% and a face value of $1,000.

a) Compute the value of the two-year coupon bond.

b) Compute the yield to maturity of the two-year couponbond.

c) If the expectations hypothesis is correct, what is the marketexpectation of the price that the two-year coupon bond will sellfor in one year (from today)?

d) If the liquidity preference theory is correct, what is themarket expectation of the price that the two-year coupon bond willsell for in one year (from today)? Assume a liquidity premium of1%.

Answer:

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