Consider the following risk-free bonds available for sale in the bond market (assume annual Ecoupons). Bond’s maturity Ask Price (per $100 of face value Coupon rate (in %) 1-year bond 100.0040 0.125% 2-year bond 3-year bond 101.2100 2% 1.625% 101.2140 a. Construct the term structure of interest rates for these three periods.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Consider the following risk-free bonds available for sale in the bond market (assume annual
+Coupons).
Bond's maturity
Ask Price (per $100 of
Coupon rate (in %)
face value
1-year bond
100.0040
0.125%
2-year bond
101.2100
2%
3-year bond
101.2140
1.625%
Construct the term structure of interest rates for these three periods.
b. Your company plans to issue three-year maturity coupon bonds. Based on its
excellent credit rating, your company pays a low constant 3% risk premium over
the relevant term-structure rates. You plan to issue bonds priced at par (i.e. price =
face value). At what level should you plan to set the coupon on your bond to
justify this price?
c. Now assume that your company wishes to issue 3-year zero coupon bonds. At
what price will these bonds sell?
Transcribed Image Text:Consider the following risk-free bonds available for sale in the bond market (assume annual +Coupons). Bond's maturity Ask Price (per $100 of Coupon rate (in %) face value 1-year bond 100.0040 0.125% 2-year bond 101.2100 2% 3-year bond 101.2140 1.625% Construct the term structure of interest rates for these three periods. b. Your company plans to issue three-year maturity coupon bonds. Based on its excellent credit rating, your company pays a low constant 3% risk premium over the relevant term-structure rates. You plan to issue bonds priced at par (i.e. price = face value). At what level should you plan to set the coupon on your bond to justify this price? c. Now assume that your company wishes to issue 3-year zero coupon bonds. At what price will these bonds sell?
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