Assume that the Pure Expectations Theory of the term structure is correct in terms of the information given below. Also assume that at the beginning of Year 3 you plan to buy a 3-year, zero-coupon Treasury bond that will mature for $10,000 (that is, you will hold the bond for Years 3, 4, and 5 and it will mature at the end of Year 5). Determine how much you would pay for this bond at Year 3. (Note: if you use nominal rates instead of forward rates, your answer may differ by $2 - $3 from the answers listed below.) Year 1 2 3 4 5 $8,236.28 $8,519.23 $8,152.87 $8,319.19 O $8,438.69 K* 3.00% 3.00% 3.00% 2.00% 2.00% Average K* 3.00% 3.00% 3.00% 2.75% 2.60% Inflation 3.00% 4.00% 5.00% 4.00% 3.00% Average Nominal Inflation Rates 3.00% 6.00% 3.50% 6.50% 4.00% 7.00% 4.00% 6.75% 3.80% 6.40% Tensiona Forward Rates 6.00% 7.00% 8.00% 6.00% 5.00%

Assume that the Pure Expectations Theory of the term structure is correct in terms of the information given below. Also assume that at the beginning of Year 3 you plan to buy a 3 -year, zero-coupon Treasury bond that will mature for $10,000 (that is, you will hold the bond for Years 3 , 4 , and 5 and it will mature at the end of Year 5 ). Determine how much you would pay for this bond at Year 3. (Note: if you use nominal rates instead of forward rates, your answer may differ by $2 $3 from the answers listed below.) $8,236.28 $8,519.23 $8,152.87 $8,319.19 $8,438.69