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You are a bond trader and observe the following three US government bonds trading in the market: (Face value = $1000.)
A: A ten-year zero coupon bond trading at $446.38.
B: A ten-year 8.4% annual coupon bond trading at $1,000.00.
C: A ten-year 4.2% semi-annual coupon bond trading at $728.89. The term structure is flat.
a) What is the market interest rate that applies to all bonds?
b) What is the YTM on the three bonds? Suppose now you see the following U.S. government bond selling on the market: D: A ten-year 5% annual coupon bond trading at $775.00.
c) Are you surprised by the market price? Why or why not? Provide numerical justification.
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