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a) Three US government bonds, A, B and C, each with face value $1000, are currently selling in the market for prices of $938.97, $955.55
a) Three US government bonds, A, B and C, each with face value $1000, are currently selling in the market for prices of $938.97, $955.55 and $1001.68 respectively. Bond A is a zero-coupon bond with one year to maturity, bond B has a coupon rate of 5% and two years to maturity and bond C has a coupon rate of 8% and three years to maturity? All coupons are paid annually. i. Infer the US spot rate curve from these data. [7 marks] ii. Give two possible explanations that might be used to explain why the curve takes the shape that it does. [3 marks]
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