Purchase a zero coupon bond

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Reference no: EM13712510

Purchase a zero coupon bond that pays off $84,000 in three years' time. No such bond exists in the market on the date you wish to transact, so you decide to create a synthetic 3-year zero coupon bond which will pay out $84,000 at the end of 3 years. The following bonds are available:

A 3-year 5% annual coupon bond with a face value of $1,000 which matures in 3 years and which costs $980
A 2-year zero coupon bond with a face value of $1,000 that matures in two years which costs $850.
A 1 year zero coupon bond with a face value of $1,000 which costs $920.

a) Describe how you could create a synthetic 3-year zero coupon bond using the three bonds above

b) Calculate the price you should pay for this bond

c) What is the yield to maturity of this synthetic 3-year zero-coupon bond?

Reference no: EM13712510

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