A six-month zero-coupon bond with face value $100 sells for $99.46, a one-year zerocoupon bond sells for $97.23, and an 18-month zero-coupon bond sells for $90.50. Suppose a new coupon bond, making semi-annual coupon payments, is issued today with face value $100, maturity of 18 months, and a semi-annual coupon payment of 9% (the 9% is expressed as an annual rate).
(a) Calculate the no-arbitrage price of the coupon bond today.
(b) Calculate the implied forward rates in this economy.
(c) If the liquidity preference theory is correct and there exists a liquidity premium of 0.5% per period, what is the market’s expectation of the rice the bond will sell for in one year? 1 year = 2 periods here.