Bond
Type
Face Value
(ZMW)
Coupon
Value (%)
Maturity
(Years)
Price (ZMW)
A
Zero coupon bond
100.00
1
92.00
B
Coupon Bond
100.00
8
2
101.32
Source: LUSE, (2023)
a) If the coupon bond (bond B) makes only annual payments, what discount factors (DF1,
DF2) are imbedded in these prices?
b) What are the 1-year, and 2-year spot rates (rā and r2)
c) Suppose that you would like to purchase a two-year coupon bond with a face value of
ZMW 10,000 and a coupon rate of 6% (with annual coupon payments). Since such a bond
is not traded in this economy, what portfolio of bonds A and B could you form to satisfy
your needs?
d) What is the exact yield to maturity on
1. Bond A
2. Bond B
Total: 25 marks]