Assume the spot rates r(1) = 9%, r(2) = 10% and r(3)= 11%. Consider a two-year annual coupon bond. The coupon rate is 6%. What is the MOST LIKELY yield to maturity y(2)?

A. 8.95%
B. 9.12%
C. 9.97%

Correct Answer: C

r(1) < y(2) < r(2) so A is impossible.

y(2) should be closer to r(2) than to r(1) because the bond's largest cash flow occurs in Year 2.