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2. Forward Rates Problems (50 points) Assuming in December of 2014, the term structure of Treasury securities included the following rates: Security Annualized Yield (%)

2. Forward Rates Problems (50 points) Assuming in December of 2014, the term structure of Treasury securities included the following rates: Security Annualized Yield (%) 3-month bill 4.50 6-month bill 4.57 1-year note 4.52 2-year note 4.51 3-year note 4.48 a) The six-month annualized yield expected in the second half of year 2015 (forward rate for 6-month bill in June 2015) b) The one-year expected yield for year 2017 (forward rate for 1-year note in December 2016) c) Suppose the 8-year spot interest rate is 8 percent and the 3-year spot rate is 4 percent. What is the implied forward rate on a 5-year bond originating 3 years from now? d) Suppose the 5-year spot interest rate is 6 percent. Under the expectation hypothesis the forward rate on a 3-year bond originating 2 years from now was estimated. The estimated forward rate is 5.5 percent. What is the 2 -year bond spot rate?

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