Use the following information to answer the question(s)below.
Suppose the current zero-coupon yield curve for risk-free bonds is as follows:
-The price per $100 face value of a three-year,zero-coupon,risk-free bond is closest to:
A)$93.80.
B)$90.06.
C)$89.16.
D)$86.39.

Question

Use the following information to answer the question(s)below.
Suppose the current zero-coupon yield curve for risk-free bonds is as follows: 
-The price per $100 face value of a three-year,zero-coupon,risk-free bond is closest to:
A)$93.80. 
B)$90.06. 
C)$89.16. 
D)$86.39.

Quizplus · Accepted Answer

Using the zero-coupon yield curve, we can calculate the yield to maturity for a three-year bond:

YTM = (1 + 0.03)^(-1) * (1 + 0.035)^(-2) * (1 + 0.04)^(-3) - 1 = 0.0364 or 3.64%

Using the formula for the price of a zero-coupon bond, we can calculate the price of the three-year bond:

Price = 100 / (1 + YTM)^3 = $89.16

Therefore, the closest price per $100 face value is $89.16, so the best choice is C.

Use the Following Information to Answer the Question(s)below