Suppose that a 2-year zero coupon bond trades for $90.70 per $100 face value. Also suppose that a 2-year coupon bond paying annual coupons of 4% trades for $98.20 per $100 of face value.
(a) Find the 1-year and 2-year interest rates.
(b) Compute the price of a 2-year coupon bond with face value of $100 and annual coupon of 12%.
(c) Suppose that a certain dealer was willing to buy or sell the bond in (b) for $114. What would you do?
(d) What are the yield-to-maturities of the 4% and 12% coupon bonds? (as an APR with annual compounding).
(e) Explain why the yield to maturity of the 10% coupon bond is lower than the 4% coupon bond.