1. Method 3: Pricing of Coupon Bond Pricing of coupon bond without knowing the yield to maturity

2. Using Spot Rates to Price Coupon Bonds A coupon bond can be viewed as a series of zero coupon bonds. To find the value each payment is discount at the zero coupon rate. Once the bond value is found, one can solve for the yield. It’s the reason that similar maturity and default risk bonds sell at different yields to maturity.

3. Sample Bonds A B Maturity4 years 4 years Coupon Rate6%8% Par Value 1,0001,000 Cash Flow in 1-36080 Cash Flow in 4 1,0601,080 Assuming Annual compounding

4. Calculation of Price Using Spot Rates Bond A Period Spot Rate Cash Flow PV of Flow 1.056057.14 2.05756053.65 3.0636049.95 4.0671,060817.80 Total978.54

5. Calculation of Price Using Spot Rates Bond B Period Spot Rate Cash Flow PV of Flow 1.058076.19 2.05758071.54 3.0638066.60 4.0671,080833.23 Total1,047.56

6. Solving For Yield to Maturity Bond A Bond Price978.54 YTM6.63% Bond B Price1,047.56 YTM6.61%