solution

You invest in a three-year bond with a face value of $100, a yield of 6% pa and a fixed coupon rate of 5% pa, paid semi-annually. So, there are two coupons per year, paid in arrears every six months. Which of the following statements is NOT correct? a. The current bond price is $97.2914 b. The effective annual rate of the three year bond is 6.0900% c. If this company also has a 2 year bond on the issue with a semi-annual yield of 4%, the forward rate over the third year (from t=2 to t=3), expressed as an effective annual rate, is 10.3120% d. The bond quotes indicate that the yield curve is inverse (downward sloping). e. Just after a coupon is paid on the three-year bond, the price is expected to be slightly higher compared to the price a year earlier just after that previous coupon was paid.