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Consider the yield curve presented in Table 1 at p.2. Consider two bonds both with 1 year maturity but different coupon rates. For both bonds coupon payments are semiannual. Bond 1 coupon rate is 10% , bond 2 coupon rate is 2%. i) Compute the prices of these coupon bonds and write down how you would compute the Yields To Maturity (YTM) of each bond ii) The computation of YTM indicates that the YTM of bond 1 is 6.70% that of bond 2 is 6.72% . Why are they different? Does the difference in yields imply that one is a better “buy” than the other?

Table 1 Yield curve on June 29 Maturity Yield

0.25 6.33%

0.50 6.49%

0.75 6.62%

1.00 6.71%

1.25 6.79%

1.50 6.84%

1.75 6.87%

2.00 6.88%


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