1.Bond Pricing.

The one-year spot rate is 7 percent and the two-year spot rate is 11 percent.

A.What is the price of a two-year bond that pays an annual coupon of 7 percent?

B.What is the yield to maturity of this bond?

C.Why is it important to have some understanding of the term structure of interest rates, spot rates, forward rates, and yield to maturity, as it applies to making capital budgeting decisions?This includes using the use of tools such as NPV, IRR, comparing and pricing similar debt instruments, of similar quality(coupon and maturity)?

D.Please briefly describe two of at least four theories which assist in explain Term Structure and yield curve behavior?