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Problem 3a: Betty and Bob buy 3 bonds. The portfolio is as per:
Problem 3a: Betty and Bob buy 3 bonds. The portfolio is as per:
they pay $80 for a 6 month ZCB with $100 redemption value;
they pay $94 for a 1 year ZCB with $100 redemption value;
they pay $100 for a 1year coupon bond with a coupon rate of 8% per annum payable semiannually and a redemption value of $100.
Use the Cash Flow Method, discussed in your text in Section 32, and algebra to find the portfolio yield to maturity.
3b Find the yield to maturity for each individual bond. Be sure to justify your answers using algebra or well known rules. Now use The Weighted Average Method, discussed in your text in Section 32, to find the yield to maturity of the portfolio. Compare the results in parts a. and b.
