Question

The yield to maturity on 1-year zero-coupon bonds is currently 7\%; the YTM on 2-year zeros is $8 \%$. The Treasury plans to issue a 2 -year maturity coupon bond, paying coupons once per year with a coupon rate of $9 \%$. The face value of the bond is $$\$ 100$$. a. At what price will the bond sell? b. What will the yield to maturity on the bond be? c. If the expectations theory of the yield curve is correct, what is the market expectation of the price for which the bond will sell next year? d. Recalculate your answer to part (c) if you believe in the liquidity preference theory and you believe that the liquidity premium is $1 \%$.

   The yield to maturity on 1-year zero-coupon bonds is currently 7\%; the YTM on 2-year zeros is $8 \%$. The Treasury plans to issue a 2 -year maturity coupon bond, paying coupons once per year with a coupon rate of $9 \%$. The face value of the bond is $$\$ 100$$.
a. At what price will the bond sell?
b. What will the yield to maturity on the bond be?
c. If the expectations theory of the yield curve is correct, what is the market expectation of the price for which the bond will sell next year?
d. Recalculate your answer to part (c) if you believe in the liquidity preference theory and you believe that the liquidity premium is $1 \%$.

Investments

Zvi Bodie, Alex… 13th Edition

Chapter 15, Problem 11

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Step 1

The bond pays a coupon of 9% on a face value of $100, which means it pays $9 annually. The bond has a maturity of 2 years. We need to discount the cash flows (coupons and face value) using the yield to maturity (YTM) of the corresponding zero-coupon bonds. The Show more…

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The yield to maturity on 1-year zero-coupon bonds is currently 7\%; the YTM on 2-year zeros is $8 \%$. The Treasury plans to issue a 2 -year maturity coupon bond, paying coupons once per year with a coupon rate of $9 \%$. The face value of the bond is $$\$ 100$$. a. At what price will the bond sell? b. What will the yield to maturity on the bond be? c. If the expectations theory of the yield curve is correct, what is the market expectation of the price for which the bond will sell next year? d. Recalculate your answer to part (c) if you believe in the liquidity preference theory and you believe that the liquidity premium is $1 \%$.

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