Question #70442

The yields to maturity on five zero coupon bonds are given below:
Years to Maturity: 1 year (yield of 12%), 2 years (yield of 14%), 3 years (yield of 15%), 4 years (yield of 15.5%), and 5 years (yield of 15.7%)
(a)What is the implied forward rate for the third year?
(b) Compute the yield to maturity of a 5-year annual coupon bond with a coupon
rate of 5%. Also compute the yield to maturity of a 5-year annual coupon bond
with a coupon rate of 10%. Which one is higher, why?

Expert's answer

a) So, forward rates will be nearly 0 %, because we have zero coupon.

b) I think, yield to maturity of a 5-year annual coupon bond

with a coupon rate of 10% is higher than the yield to maturity of a 5-year annual coupon bond with a coupon rate of 5%, because bond's coupon rate is the actual amount of interest income earned on the bond each year based on its face value, that`s why if coupon rate is higher, then profit will be more.

b) I think, yield to maturity of a 5-year annual coupon bond

with a coupon rate of 10% is higher than the yield to maturity of a 5-year annual coupon bond with a coupon rate of 5%, because bond's coupon rate is the actual amount of interest income earned on the bond each year based on its face value, that`s why if coupon rate is higher, then profit will be more.

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