1. (10 marks) The following table shows the yield to maturity (YTM) of various types of bonds on October 13, 2017.

2-year

5-year 10-year

U.S. Treasury

1.495% 1.901% 2.274%

Corp. AAA

1.645% 2.223% 2.886%

Corp. AA

1.733% 2.279% 2.983%

a. What is the expected yield of a three-year treasury two years from the date above if the pure expectations theory holds? (3 marks)

b. What explains the 0.322% difference in YTM between a 5-year U.S. Treasury and a 5-year AAA corporate bond? (3 marks)

c. Explain why the shape of the Treasury yield curve is taken as an indicator of the state of the economy.

marks) The following table shows the yield to maturity (YIM) of various types of bonds on October 13, 2017 2-year 5-year 10-year U.S. Treasury Corp. AAA Corp. AA 1.495% 1.645% 1.733% 1.901% 2.223% 2.279% 2.274% 2.886% 2.983% a. What is the expected yield of a three-year treasury two years from the date above if the pure expectations theory holds? (3 marks) b. What explains the 0.322% difference in YTM between a 5-year U.S. Treasury and a 5-year AAA corporate bond? (3 marks) c. Explain why the shape of the Treasury yield curve is taken as an indicator of the state of the economy. (4 marks) marks) The following table shows the yield to maturity (YIM) of various types of bonds on October 13, 2017 2-year 5-year 10-year U.S. Treasury Corp. AAA Corp. AA 1.495% 1.645% 1.733% 1.901% 2.223% 2.279% 2.274% 2.886% 2.983% a. What is the expected yield of a three-year treasury two years from the date above if the pure expectations theory holds? (3 marks) b. What explains the 0.322% difference in YTM between a 5-year U.S. Treasury and a 5-year AAA corporate bond? (3 marks) c. Explain why the shape of the Treasury yield curve is taken as an indicator of the state of the economy. (4 marks)