Additional Bond Problems
1. Consider a bond with a 10% coupon and with a YTM of 8%. If the bond’s YTM remains
constant, in one year, will the bond price be higher, lower, or unchanged? Lower.
2. A 20 year bond with a face value of $1,000 and a coupon rate of 8% is currently priced at $1230.
What is its YTM? 6%
3. Assume you have a one-year investment horizon and are trying to choose between two bonds.
Both have the same degree of default risk and mature in 10 years. The first bond is a zero-coupon bond
that pays $1,000 at maturity. The second has a 14% coupon rate and pays the $100 coupons once a year.
a. If both bonds are now priced to yield 8% to maturity, what are their prices? $463.19,
b. If you expect their yields to maturity to be 8% in one year, what will their prices be then?
c. What is your rate of return on each bond during the one-year holding period? 0.08, 0.08
4. A newly issued bond pays its coupons once a year. Its coupon rate is 5%, its maturity is 20
years, and its YTM is 8%. Find the holding-period return for a one-year investment period if the bond is
selling at a YTM of 7% by the end of the year. 0.1954
5. The YTM on one-year zero-coupon bonds is 8%. The YTM on two-year zero-coupon bonds is
9%. What is the forward rate of interest for the second year? 0.10
6. The following table contains spot rate and forward rates for three years. However, the label got
mixed up. Can you identify which row of the interest rates represents spot rates and which one the
Year 1 2 3
Spot or Forward rates? 10% 12% 14%
Spot or Forward rate? 10% 14.0364% 18.1078%
Top row is spot rate, second is forward rate.
7. The current yield curve for default-free zero-coupon bond is as follows:
Maturity (years) YTM
What are the implied one-year forward rates? 0r1 = 0.10, 1r2 = 0.12, 2r3 = 0.161