(1) (I) You have observed that the market prices for a one-year and a two-year zero coupon bonds (with face value of $1000) that have no default risks are $965.90 and $901.54, respectively. How much would you pay for a two-year 5.8 percent annual coupon bond that has the same default risk as the zeros?

(ii) A 3-year treasury bond has a face value of $1000 and annual coupon of 8%. From the
yield curve, you have the following information: the 1-year zero coupon bond rate is r1=
2%, the 2-year zero coupon bond rate is r2 = 4% and the 3-year zero coupon bond rate
is r3 = 5%. Compute the price of the bond today. Calculate the YTM of the bond.

(2) The current price of a zero-coupon bond maturing in 1-year with face value of 100 is 90.9. The price of a 2-year annual coupon bond with a face value of 100 and an annual coupon rate of 10% is 92.26. The price of a 3-year annual coupon bond with a face value of 100 and an annual coupon rate of 8% is 75.82. Based on the information you have regarding these three bonds, please answer the following questions:

(I) Find the Yield Curve associated with these three bonds?
(ii) Compute the yield-to-maturity of the three bonds. Explain why there is a difference in
the yield-to-maturity of the three bonds.

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