Prices of zero-coupon bonds

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The UK government has issued a Treasury bond which has exactly 3 years to maturity. The coupon rate on these bonds is 3% per year and coupons are paid annually. The face value of the Treasury bond is £100. Below are the prices of zero-coupon bonds with identical face value to the Treasury bond:

Maturity Price
1 97
2 92
3 89

The current market price for the Treasury bond is £96. Explain carefully whether this is a fair price, detailing all your calculations.

If it is not a fair price, devise a trading strategy that can be used to generate profits and explain carefully your rationale.

Given the relative levels of the bond's fair value and its face value, what can one say about the yield to maturity on the bond?

Reference no: EM132774599

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