Here the rates are all expressed as an APR with semi-annual compounding.

Maturity (years)	rate on 2/18/21	rate on 2/18/22
1	0.06%	1.09%
9	1.19%	1.99%
10	1.34%	2.06%

 

(a) Find the price on 2/18/21 of a 10-year zero coupon bond with face value of $100. That is, what is the market price that you would have needed to pay 2/18/21 for a bond (backed by the Treasury) that pays you $100 on 2/18/2031.

 

(b) Suppose that last year on 2/18/21, you purchased $5,000 in face value of zero coupon bonds that mature on 2/18/2031.

(i) How much did you pay to buy the bonds?

ii) Suppose that after buying the 10-year bonds on 2/18/21, you sold it on 2/18/22.

What would the return (in percent) have been for this strategy?

 

(c)Suppose that instead of the strategy you used in (b), you decided to invest the same amount in 1-year T-bills (which are zero coupon) on 2/18/21. What would the return (in percent) be on your investment over the one year?