Calculate A Annual Coupon Paying Bond Into A Zero Coupon Equivlent?

By External contributor | Published: November 1, 2009

I need a little help with the following question.
following yield curve for bonds that pay annual coupons:
1 year 6.50%
2 year 7.25%
3 year 8.00%
4 year 9.50%
Given these rates, calculate the zero-coupon equivalent yield curve.
How would I go about finding an equivalent yeild curve?
Thanks

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One Comment

  1. Sachin
    Posted November 1, 2009 at 9:33 pm | Permalink

    I you invest $1 today at end of 4 years you will have $1.351
    interest 0.065 0.0725 0.08 0.095
    amount 1 1.065 1.1422 1.23 1.351
    Now the task is to get zero-coupon yield(y) which is represented by
    1(1+y)(1+y)^2*(1+y)^3*(1+y)^4
    you can solve this to get the yield
    y = 7.807 %

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