Problem:
Consider three risk free Eurobonds (which pay coupons annually). Their times to maturity, coupon rates and current market prices (based on a face value of$100) are as follows: Bond A 1 yr 9% $101.25; Bond B 2 yrs 8% 99.75; Bond C 3 yrs 7% $96.00.
Requirement:
Question 1: What are the yields to maturity for Bond A, B and C, respectively?
Question 2: If arbitrage opportunities are driven out of the market, what should the current prices of one-, two-, and three-year zero- coupon bonds with a face value of $1?
Question 3: What should be the spot yields on one-, two-, and three-year zero-coupon bonds?
Question 4: What should the annuity yield be on one-, two-, and three-year annuity?
Question 5: A three-year 9.25% par value corporate bond was recently issued in the market. What is the default risk premium of three corporate bonds?
Please provide step by step solution of each question.