You observe the following Treasury yields (all yields are shown on a bond-equiv. alent basis): Yield to Maturity Spot Rate Year (%) (%) 0.5 10.00 10.00 1.0 9.75 9.75 1.5 9.50 9.48 2.0 9.25 9.22 2.5 9.00 8.95 3.0 8.75 8.68 3.5 8.50 8.41 4.0 8.25 8.14 4.5 8.00 7.86 5.0 7.75 7.58 5.5 7.50 7.30 6.0 7.25 7.02 6.5 7.00 6.74 7.0 6.75 6.46 7.5 6.50 6.18 8.0 6.25 5.90 8.5 6.00 5.62 9.0 5.75 5.35 9.5 5.50 ? 10.0 5.25 ? All the securities maturing from 1.5 years on are selling at par. The 0.5 and one- year securities are zero-coupon instruments.

a. Calculate the missing spot rates.

b. What should the price of a 5% four-year Treasury security be?

AppendixLO1