Assume that a five-year, government-issued coupon bond at par value NOK 100,000 and 10% coupon rate was issued today. The bond pays one annual coupon at the end of each year, while the par value is redeemed exactly five years from today including the last coupon payment. In the market, the bond is considered default-free.

Government-issued, zero-coupon bonds (B0,T) with maturities ranging from exactly one to five years from today (T= 1,2, . . . ,5) are currently trading at the NOK-prices listed below. Assume that the bonds are default-free.

Maturity

Market price

1 year 2 year 3 year 4 year 5 year

93,023.16; 84,167.99; 75,131.42; 67,073.49; 60,017.97

To the following questions, please provide numerical answers based on theunbiased expectations theoryof the term structure of interest rates:

1. (a)(7 points) Calculate the current, risk-free spot-rates for one, two, three, four, and five years from today.
2. (b)(7 points) Calculate the one-year forward rates for year two, year three, year four and year five.
3. (c)(8 points) Calculate the equilibrium market price of the five-year, government-issued coupon bond issued today.
4. (d)(8 points) What must be the equilibrium rate of interest on a one-year investment (or loan) in year five?