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a.Using the theoretical spot rates in table 16.2, calculate the theoretical value of a 7%, six-year Treasury bond. b.Using the theoretical spot rates in table
a.Using the theoretical spot rates in table 16.2, calculate the theoretical value of a 7%, six-year Treasury bond.
b.Using the theoretical spot rates in table 16.2, calculate the two-year forward rate four years from now.
c.Verify your answer to part b by assuming an investment of $100 is invested for six years.
Table 16.2 Theoretical spot rates. Maturity (years) Yield to Maturity (%) Theoretical Spot Rate 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.00 7.50 8.00 8.50 9.00 9.50 10.00 0.0800 0.0830 0.0890 0.0920 0.0940 0.0970 0.1000 0.1040 0.1060 0.1080 0.1090 0.1120 0.1140 0.1160 0.1180 0.1190 0.1200 0.1220 0.1240 0.1250 0.08000 0.08300 0.08930 0.09247 0.09468 0.09787 0.10129 0.10592 0.10850 0.11021 0.11175 0.11584 0.11744 0.11991 0.12405 0.12278 0.12546 0.13152 0.13377 0.13623 Table 16.2 Theoretical spot rates. Maturity (years) Yield to Maturity (%) Theoretical Spot Rate 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.00 7.50 8.00 8.50 9.00 9.50 10.00 0.0800 0.0830 0.0890 0.0920 0.0940 0.0970 0.1000 0.1040 0.1060 0.1080 0.1090 0.1120 0.1140 0.1160 0.1180 0.1190 0.1200 0.1220 0.1240 0.1250 0.08000 0.08300 0.08930 0.09247 0.09468 0.09787 0.10129 0.10592 0.10850 0.11021 0.11175 0.11584 0.11744 0.11991 0.12405 0.12278 0.12546 0.13152 0.13377 0.13623Step by Step Solution
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