Problem: These are the prices for zero coupon bonds per $1,000 of face value:
Maturity Price
1 yr $951.5
2 yr $895.6
3 yr $825.4
Show all work and formulae
a) What is the annual yield-to-maturity of each bond if the yield is compounded annually? Show work and formulas
b) Consider the prices of zero coupon bonds above, what is the fair price of a coupon bond that pays a coupon of $10 at year 1, $10 at year 2, $10 at year 3 and repays the principal of $100 at year 3?
c) What is the annual yield-to-maturity of the coupon bond in b)?