1. If a pure discount three-year bond sells for $782 and a pure discount four-year bond sells for $733, what is the expected 12-month interest rate in three years time? Both have a face value of $1000.
2. If 12-month interest rates are expected to be 6% in three years time, describe how investors could take advantage of the pricing in question 3. What impact would this have on interest rates?
3. Twelve-month interest rates for the next four years are expected to be 5%, 6%, 6.8% and 7.4% respectively. Calculate the yield to maturity on: i) a pure discount four-year bond, and ii) a four-year 8% annual coupon bond. Explain why there is a difference.