The following table summarizes prices of various default-free zero-cou

QUESTION

The following table summarizes prices of various default-free zero-coupon bonds (expressed as a percentage of face value):Maturity (years) 1 2 3 4 5Price (per $100 face value) 94.52 89.68 85.40 81.65 78.3521)The yield to maturity for the two year zero-coupon bond is closest to:21)______A)5.6%B)6.0%C
21) According to the given information,Face value of the bond = $100Price of the bond in year-2 = $89.68Coupon rate = 0%Number of years = 2Calculating the YTM of the bond using excel sheet:YTM is nothing but the yield or rate of the bond.Step1: Go to excel and click “insert” to insert the function.Step2: Select the “Rate” function as we are finding the yield to maturity of the bond.Step3: Enter the values as Nper = 2; PMT = 0; PV = 89.68; FV = -100Step4: Click “OK” to get the desired value.The value comes to “5.60%”Therefore, the YTM of the bond is 5.60%The correct option is A) 5.6”) Calculating the YTM for a 3-year bond:Here the price of the

ond = $85.40Number of years = 3Face value of the bond = $100Coupon rate = 0%Step1: Go to excel and click “insert” to insert the function.Step2: Select the “Rate” function as we are finding the yield to maturity of the bond.Step3: Enter the values as Nper = 3; PMT = 0; PV = 85.40; FV = -100Step4: Click “OK” to get the desired value.The value comes to “5.40%”Therefore, the YTM of the bond is 5.40%Hence the correct option is C) 5.40%

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