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.

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.