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1) Fabozzi, 10 th edition, Chapter 6, Problem #14 (15 points) You observe the following Treasury yields (all yields are shown on a bond equivalent

1)Fabozzi, 10thedition, Chapter 6, Problem #14 (15 points) You observe the following Treasury yields (all yields are shown on a bond equivalent basis):

Year (Period)

Yield to Maturity (%)

Spot Rate (%)

0.5 (1)

10.00

10.00

1.0 (2)

9.75

9.75

1.5 (3)

9.50

9.48

2.0 (4)

9.25

9.22

2.5 (5)

9.00

8.95

3.0 (6)

8.75

8.68

3.5 (7)

8.50

8.41

4.0 (8)

8.25

8.14

4.5 (9)

8.00

7.86

5.0 (10)

7.75

7.58

5.5 (11)

7.50

7.30

6.0 (12)

7.25

7.02

6.5 (13)

7.00

6.74

7.0 (14)

6.75

6.46

7.5 (15)

6.50

6.18

8.0 (16)

6.25

5.90

8.5 (17)

6.00

5.62

9.0 (18)

5.75

5.35

9.5 (19)

5.50

?

10.0 (20)

5.25

?

All the securities maturing from 1.5 years on are selling at par. The 0.5 and 1.0-year securities are zero-coupon instruments. Answer the below questions

(a)Calculate the missing spot rates.

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

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