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Assume that the spot rate for the first year, the forward rate for the second year and the forward rate for the third year are

Assume that the spot rate for the first year, the forward rate for the second year and the forward rate for the third year are 4.2%, 4.4% and 4.5% respectively. What must the price of a 3 year government non-callable bond with an annual coupon of 6 % be.

Bond

Coupon Rate

Maturity

Market Price

A

3% paid annually

1 year

$998.06

B

4% paid annually

2 years

$1011.49

C

7% paid annually

3 years

$1094.68

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