ou observe the following yields on zero coupon U.S. Treasury STRIPS. The settlement date is 11/15/2017. All yields are based on semiannual compounding.

Maturity Date Yield

5/15/2018 2.20%

11/15/2018 2.50%

5/15/2019 2.70%

11/15/2019 2.85%

5/15/2020 3.00%

11/15/2020 3.10%

(a) Calculate the STRIP prices that correspond to the yields above.

Maturity Date	Yield	Semi-annual Yield	Price=Face value/(1+Semi-annual Yield)^No.of semi-annual compounding periods still to maturity
May 15,2018	2.20%	1.10%	100/(1+0.011)^1=	98.91197
Nov.15,2018	2.50%	1.25%	1000/(1+0.0125)^2=	99.98438
May 15,2019	2.70%	1.35%	1000/(1+0.0135)^3=	99.99975
Nov.15,2019	2.85%	1.425%	1000/(1+0.01425)^4=	99.999996
May 15,2020	3%	1.50%	1000/(1+0.015)^5=	99.99999992
Nov.15,2020	3.10%	1.55%	1000/(1+0.0155)^6=	99.9999999986

(b) What is the forward rate for a one year investment from 5/15/2019 to 5/15/2020? From 11/15/2019 to 11/15/2020?

Forward rate = 2.20% will be compounded semi annually at rate of 2.21% for 5/15/2019.

2.85% will be compounded semi annually at the rate of 2.87 % for 11/15/2019.

(c) Suppose there existed a Treasury Note that had a coupon rate equal to 3% paid semiannually and a maturity date of 11/15/2020? What is the fair price of this security on 11/15/2017, given the zero coupon STRIP yields listed above? What is the yield to maturity for this bond?

The yield rate will be 3.02% if compounded semi annually .

The price cannot be determined as there is no clue in the above information mentioned .

(d) Suppose there existed a Treasury Note that had a coupon rate equal to 4% that matured on 11/15/2019 and was priced at 102. Suppose further that this bond was eligible for the STRIPS program. Could you make any money by stripping or reconstituting this bond?

(e) Assume that the Expectations Hypothesis was true. Given the STRIP yield curve above, what is the expected rate of return on an investment in the STRIP maturing 11/15/2018, if purchased on 11/15/2017 and sold on 5/15/2018? If purchased on 11/15/2017 and sold on 11/15/2018?