Exercise 5.1

The price of a 6.375% 2-year Treasury note is 101.34. Note that from Example 5.2, 6-mth, 12-mth, and 18-mth spot rates are 5.12%, 5.47%, and 5.63%, respectively. What is the theoretical spot rate on a security with a single cash flow due in two years?

Data: Example 5.2

September 15, 2008: consider the 47/8% Treasury note due March 15, 2010

The price of the note is 9830/32, or $98.9375 per $100 of par value

Treasury bills due in 6 months and 12 months have yields of 5.12% and 5.47%, respectively

6-month spot rate = 5.12% 12-month spot rate = 5.47%

ONLY NEED TO SOLVE EXERCISE 5.1, FEEL FREE TO USE DATA FROM EXAMPLE 5.2 IF NEEDED