You Are Given Two Discount Bonds of One-Year and Two-Year

question 10

Multiple Choice

You are given two discount bonds of one-year and two-year maturities, with prices of 95 and 90, respectively. A third bond of three-year maturity and an annual coupon of 8% is trading at par. What is the three-year continuously-compounded zero-coupon rate?

• A) 7.7%
• B) 7.8%
• C) 7.9%
• D) 8.0%

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Definitions:

Present Value

The current evaluation of a forthcoming cash amount or cash flow series, considering a specific rate of financial return.

Land Rent

Land rent is the payment made for the use of a piece of land, representing the value derived from its use.

Interest Payments

The payments made periodically by a borrower to a lender as compensation for the use of borrowed funds.

Interest Rates

The percentage of a sum of money charged for its use, determining the cost of borrowing money or the return on invested capital.