Suppose that 1-year, 2-year, and 3-year zero rates are, respectively, 1%, 2%, and 3% per annum with continuous compounding.
a)Compute the cash price of a bond with a face value of $100 that matures in 3 years and pays an annual coupon of 1% at the end of each year. Assume that the bond has just been issued and that the first annual coupon is paid in one year.
b)Compute the annual coupon rate of a three-year bond which is issued at par. Assume that the bond pays its coupon annually at the end of each year and that it has just been issued.
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