Reference no: EM132523982

Question: Twelve-month interest rates for the next four years are expected to be 5%, 6%, 6.8% and 7.4% respectively. Calculate the yield to maturity on:

i) a pure discount four-year bond, and

ii) a four-year 8% annual coupon bond.

Explain why there is a difference.

I have 2 queries with regards to this:

i) Is the pure discount for a 4-year bond 6.8% or 7%, because the question said 'next 4 years' and I am unsure as to which year 5% is.

ii) How do you calculate the YTM using just an annual coupon rate and spot rate? So far, I have only seen YTM calculations with Face/Par values.