The yield-to-maturity ytm on one-year bond with zero coupon, Ask an Expert

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The yield-to-maturity (YTM) on one-year bond with zero coupon and face value $ 1000 is 5 %. The YTM on two-year bond with 5 % coupon paid annually and face value $ 1000 is 6 %. (i) What are the current prices of these bonds? (ii) Find Macaulay durations of these bonds. Consider a third bond which is a zero coupon two-year bond with face value $ 1000. (iii) What must be the price of the third bond so that the Law of One Price holds. Explain where you use the LOOP. (iv) Find the yield-to-maturity on the thrid bond with the price from part (iii).

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