Suppose that all investors expect that interest rates for the 4 years will be as follows: $\begin{array}{lc}
\text { Year } & \text { Forward Interest Rate } \
0 & \text { (today) } 3\% \
1 & 4\% \
2 & 5\% \
3 & 6\%
\end{array}$ What is the price of 3-year zero-coupon bond with a par value of $1,000?
A) $889.08
B) $816.58
C) $772.18
D) $765.55
E) None of the options are correct.

Question

Suppose that all investors expect that interest rates for the 4 years will be as follows: $\begin{array}{lc}
\text { Year } & \text { Forward  Interest Rate } \
0 & \text { (today) } 3\% \
1 & 4\% \
2 & 5\% \
3 & 6\%
\end{array}$ What is the price of 3-year zero-coupon bond with a par value of $1,000?
A) $889.08
B) $816.58
C) $772.18
D) $765.55
E) None of the options are correct.

Quizplus · Accepted Answer

The price of a 3-year zero-coupon bond with a par value of $1,000 can be calculated as follows:Bond Price = $1,000 / (1 + 0.03)^1 * (1 + 0.04)^2 * (1 + 0.05)^3= $1,000 / 1.03 * 1.0816 * 1.1576= $889.08

Suppose That All Investors Expect That Interest Rates for the 4