Answer Happy

A bond is said to be “selling at par” if its current
price equals its face value. Currently, the 1-year, 2-year,
and 3-year coupon-paying Treasuries selling at par have annual
coupon rates of 2%, 4%, and 6%, respectively. Assume all
coupons are paid at the end of the year.
(a) What is the yield-to-maturity on the 1-year, 2-year,
and 3-year coupon-paying Treasuries,
respectively?
(b) Now consider the 1-year, 2-year, and 3-year
zero-coupon Treasuries. What is the yield-to-maturity on the
1-year, 2-year, and 3-year zero-coupon bonds, respectively? (Keep
your calculations to 4 decimal
digits).
(c) What is the 1-year and 2-year ahead 1-year forward
rate?
(d) Graph the following yield curves in the same
diagram:
i. The yield curve obtained from the par- coupon-paying
treasuries
ii. The yield curve obtained from the zero-coupon
treasuries
iii. The forward rate curve (forward rates against
horizon)
(e) Comment on the relative position of the three
curves.