The yield rate on a one year zero-coupon bond is currently 7% and the yield rate on a 2-year zero coupon bond is

currently 8%. The Treasury plans to issue a two year bond with a 9% annual coupon, maturing at $100 par value. Determine the yield to maturity of the two year coupon bond. 

SolutionP= price of the coupon bondP= [9/ (1.07) ˆ1] + [109/ (1.08) ˆ2]P= $101.86From interest value factor tables YTM= 7.958%From 9 PA (YTM, 2) + 100 PF (YTM, 2) = 101.86, where PA =…