Consistent with your book, assume interest compounds semiannually. Suppose that one year forward rates are as follows.

Note that this means that at year 1, the one year forward rate is 7.00% and so forth.

Year Forward Interest Rate 0.00 5% (today)

1.00 7.00%

2.00 9.00%

3.00 10.00%

4.00 11.00%

a) What is the price of a 3-year zero coupon bond with a par value of $1,000. (2 pts)

b) What is the price of a 2-year maturity bond with a 10% coupon rate paid annually? (Par value = $1,000). (2 pts)

c) What is the yield to maturity of a 3-year zero coupon bond? Note that this calculation is the same thing as calculating a three-year spot rate. (2 pts)

d) Calculate the two year spot rate under pure expectations theory. (2 pts)

e) Is the term structure upward or downward sloping? (1 pt)