Expert: Doug Ingram - 3/5/2007

Question
A zero-coupon bond with $1000 par value matures in 30 years. The yield to maturity is 9% for the first 10 years and 6% for the remaining 20 years. What is the current price of the bond?

Answer
I just got back in the office.
You could buy a 10-year zero yielding 9% for 42.24  (1/(1+9%)^10)
A 20-year 6% bond would be 31.18
(1/(1+6%)^20)
It follows that a bond like this could be bought for (42.24/100) x 31.18 = 13.17

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Going backwards, the yield would be roughly 7%
(9x10 + 6x20)/30
A 7% 30-year would be (1/(1.07^30)) = 13.14 so 13.17 sounds right to me.