31. a. Calculate the two-year spot rate implied by the U.S. Treasury yield curve data given below....
Question:
31.
a. Calculate the two-year spot rate implied by the U.S. Treasury yield curve data given below. Assume that interest is paid annually for purposes of this calculation.
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b. Explain why a spot rate curve can be derived entirely from the current coupon (yield-to-maturity) yield curve.
c. Given a U.S. Treasury one-year spot rate of9.0% and a U.S. Treasury two-year spot rate of9.5%, calculate the implied one-year forward rate for the twa-year U.S. Treasury security with one year remaining to maturity. Explain why a one-year forward rate of9.6% would not be expected to prevail in a market given these spot rates.
d. Describe one practical application of the spot rate concept and one practical application of the forward rate concept.
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Years to Maturity 2 Current Coupon Yield-to-Maturity 7.5% 8.0% Spot Rate 7.5%
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