$1,000 par value zero-coupon bonds (ignore liquidity premiums) Bond
Bond Years to Maturity Yield to Maturity
A 1 6.00%
B 2 7.50%
C 3 7.99%
D 4 8.49%
E 5 10.70%
One year from now bond C should sell for (to the nearest dollar).
a. $857.
b. $894.
c. $835.
d. $821.

the expected yield to maturity for bond C in 1 year :

1.0799³ = 1.06 x (1 + r)²

1.188 = (1 + r)²

√1.188 = √(1 + r)²

1.08999 = 1 + r

r = 0.08999 = 9%

the yield to maturity of zero-coupon bonds = (future value / present value)¹/ⁿ - 1

0.09 + 1 = ($1,000 / value in 1 year)¹/²

1.09 = ($1,000 / value in 1 year)¹/²

1.09² = $1,000 / value in 1 year

value in 1 year = $1,000 / 1.09² = $1,000 / 1.1881 = $841.68 ≈ $842

d. automatic stabilizers.

explanation: