U.S. Treasuries represent a significant holding in many pension portfolios. You decide to analyze the yield curve for U.S. Treasury notes.

a. Using the data in the table below, calculate the 5-year spot and forward rates assuming annual compounding. Show your calculations. P-639 U.S. Treasury Note Yield Curve Data Years to Maturity Par Coupon Yield to Maturity Calculated Spot Rates Calculated Forward Rates 1 5.00 5.00 5.00 2 5.20 5.21 5.42 3 6.00 6.05 7.75 4 7.00 7.16 10.56 5 7.00 ? ?

b. Define and describe each of the following three concepts:

i. Short rate ii. Spot rate iii. Forward rate Explain how these concepts are related.

c. You are considering the purchase of a zero-coupon U.S. Treasury note with four years to maturity. On the basis of the above yield-curve analysis, calculate both the expected yield to maturity and the price for the security. Show your calculations.