Reference no: EM133071362

Assume the current yield curve for default-free zero-coupon bonds is as follows:

Starting from year 4, the yield curve is flat at 8% for all the longer (longer than 4 years) maturities.

Based on the above yield curve, calculate & Answer

iii). A default free bond with 8.5% coupon making annual payment, $1000 par value that matures in 4 years is newly issued to the market, what should the bond price be if it is correctly priced? What is the yield to maturity for the bond? 

iv) Suppose the above yield curve perfectly predicts the future interest rates (Future interest rates are certain in this world), a 5-year-maturity default free bond with a par value of $1,000 currently sells for $960, the bond pays 7% annual coupon rate (coupons are paid annually). What is the realized compound yield for an investor investing in this 5-year bond but with a 4-year holding period? Assuming the investor can buy the bond at the current price and will liquidate the position at the end of year 4. In year 4, the bond is correctly priced according to the yield curve. Hints: under certainty)