Question
1. Suppose that the annual yield to maturity for the 6-month and 1-year U.S. Treasury bills is 8.0% and 7.8%, respectively. Also assume the following
1. Suppose that the annual yield to maturity for the 6-month and 1-year U.S. Treasury bills is 8.0% and 7.8%, respectively. Also assume the following U.S. Treasury yield curve (the price for each issue is $100) has been estimated out to a maturity of 2 years:
Years to Maturity | Annual Yield to Maturity (BEY) | Spot Rate | Forward Rate |
1.5 7.4% 7.3825%. 6.5501%
2.0 7.2% ? ?
What are the missing spot rate and forward rate?
2. A corporate bond pays a coupon rate of 10% (semi-annual payment) and has two years to maturity. Given the information from part (a), if the Z-spread for this bond is 120 basis points, what will be the value of the bond for $100 of par value?
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