1.1) You have estimated spot rates as follows: r = 5.00%, r2 = 5.40%, r3 = 5.70%, r4 = 5.90%, r5 = 6.00%. where is the discount rate for year i. a. What are the discount factors for each date (that is, the present value of $1 paid in year (i.e., consider cash flow of $1 dollar per year for the next 5 years)? Using these rates, calculate the PV of the following bonds assuming annual coupons and face values of $1,000: 4% coupon rate, 1-year bond; and 8% coupon rate, 5-year bond. (5 marks) b. Which bond would you purchase if the economic condition has been volatile? why? Critically discuss your answer. (5 marks) (i) (ii)

1.1) You have estimated spot rates as follows: r1=5.00%,r2=5.40%,r3=5.70%,r4=5.90%,r5=6.00%. where a is the discount rate for year i a. What are the discount factors for each date (that is, the present value of $1 paid in year (i.e., consider cash flow of $1 dollar per year for the next 5 years)? Using these rates, calculate the PV of the following bonds assuming annual coupons and face values of $1,000 : (i) 4% coupon rate, 1 -year bond; and (ii) 8% coupon rate, 5 -year bond. b. Which bond would you purchase if the economic condition has been volatile? why? Critically discuss your