Bond Valuation. Imagine that the spot rates for the next three years are $r_1=5\mathrm{.}50\%,r_2=$

$5\mathrm{.}80\%,$ and $r_3=6\mathrm{.}00\%.$ Specifically, the spot rates are the ask yields on Treasury STRIPs

as of today. For example, $r_2$ is the ask yield on a STRIP that matures $2$ years from today.

Assume that the par value of each bond is $$1000.$

$($a$)$ Consider a U$.$S$.$ Treasury bond paying $$100$ in year $1,$$$100$ in year $2,$ and $$1100$ in year

What is the appropriate value of this bond? Is the appropriate value of this bond

greater or less than its par value? Why?

$($b$)$ What is the ask price of the Treasury STRIP that matures in $2$ years?

$($c$)$ What is the one$-$year forward rate between years $1$ and $2?$

Bond Valuation and Yield to Maturity in Excel. Use an Excel spreadsheet to calculate

the appropriate price and yield to maturity for the three bonds listed below:

$($a$)$ Coupon bond with coupon rate of $10\%$ and face value of $$1000$ that matures in $6$ years.

$($b$)$ Coupon bond with coupon rate of $5\%$ and face value of $$1000$ that matures in $4$ years.

$($c$)$ Coupon bond with coupon rate of $2\%$ and face value of $$1000$ that matures in $2$ years.

Assume that the one$-$year, two$-$year, three$-$year, four$-$year, five$-$year, and six$-$year spot rates

are $4\mathrm{.}00\%,4\mathrm{.}50\%,4\mathrm{.}75\%,5\mathrm{.}00\%,5\mathrm{.}20\%,$ and $5\mathrm{.}50\%,$ respectively. Please attach to your

homework a copy of the spreadsheet used to price bond $($b$).$ You do not need to show your

work for bonds $($a$)$ or $($c$).$