3.An investor is considering the purchase of a 2-year floating-rate note that pays interest semiannually. The coupon formula is equal to 6-month T-Bill rate plus 60 basis points quoted margin. The current value for 6-month T-bill rate is 4% (annual rate). The price of this note is 99.0606. What is the discount margin, 50, 55 or 60 basis?

4. Consider a 5-yr annual coupon bond with a coupon rate of 8%, and a market price of 93.6889. Assume that spot rates of 3%, 4%, 5%, 6%, and 7% for r(1) to r(5).

(A) Extrapolate one-period forward rates for 1 to 4 years from today, i.e., work out f(1,1), f(2,1); f(3,1), and f(4,1);

(B) What is the YTM for the bond?

(C) If the bond is priced with forward rates computed above, what will be the annualized rate of return?

(D) Compare the annualized rate of return computed with the forward rates and the YTM, why they are different?