Before doing a lot of research and taking ACE444, you decided (by some friend's indication) to buy a 10 year principal STRIP bond with a par value of $1000, and yield-to-maturity of 2%. You bought it in January 1, 2015.

After studying treasuries, you decide to analyze your decision.

1. You don't remember exactly what you paid for the bond in 2015 but you found out the spot rate curve at that time of your purchase (see table at the end and handout). Note that at the time, it was a negative yield curve. Please calculate what was the price you paid in 2015 for each of these bonds.
2. Also, calculate the macaulay and modified duration (in years) for your bond, and interpret those.
3. Because of events this year, assume that the yield curve has shifted and is now as is shown in the table (column labeled spot_rate_in 2020). Nothing else changed. What is the price of the bond now? Are you better off today?
4. You decided that you are going to need those funds not 5 years in the future, but 10-years in the future. Would you prefer to hold your 2015 bond to maturity, and then buy another bond for the remainder 5 years, or sell yours now and buy another 10-year principal strip bond? Please indicate the risks and considerations in your answer.

Period (semi-annual) Maturity Spot Rate_in 2015 Spot Rate_in 2020

1 0.5 0.0300 0.0095

2 1 0.027 0.0092

3 1.5 0.0263 0.0090

4 2 0.0254 0.0087

5 2.5 0.0246 0.0085

6 3 0.0240 0.0083

7 3.5 0.0235 0.0081

8 4 0.0230 0.0079

9 4.5 0.0226 0.0077

10 5 0.0223 0.0075

11 5.5 0.0220 0.0072

12 6 0.0217 0.0069

13 6.5 0.0214 0.0066

14 7 0.0212 0.0063

15 7.5 0.0209 0.0060

16 8 0.0207 0.0057

17 8.5 0.0205 0.0054

18 9 0.0203 0.0051

19 9.5 0.0201 0.0048

20 10 0.0200 0.0045