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Thread: a question for prof broverman question 15 may 2005 exam

  1. #1
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    a question for prof broverman question 15 may 2005 exam

    hi. I naively got the solution to this question simply by using the interest rates given, ie the 5% for both bonds and got the correct answer. However, based on the first part of your solution, if both bonds didn't have the same interest rates, then I am assuming I would have to do some more work??

    Thanks.

  2. #2
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    Audia,

    Since both bonds have a yield rate of 5% that will be the yield
    for one-year zero and two-year zero coupon bonds, so pv's
    will be at 5%. If the two bonds had different yield rates, there
    would have been some work involved.

    Suppose that we have a one year coupon bond with annual coupons and a two year coupon bond with annual coupons. If both bonds have a yield
    rate of i, then the one year zero rate is i and the 2-year zero
    rate will also be i.

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