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A.3. You read in a newspaper the following information about the prices of different Spanish Treasury bonds: Table 1: Treasury Bond Prices The face value of Spanish Treasury bonds is 1,000 and the repayment is at par. The bond rating is AA. You furthermore read that AA bonds pay a risk premium of 0.4 percentage points above AAA bonds. (a) How do you define the yield curve? (b) Is it possible to know with the information provided if the yield curve is upward sloping or downward sloping? Draw it in a graph. (c) Compute the 2-year spot interest rate. (d) Compute the 3-year spot interest rate. Suppose that 3-year spot interest rate that you obtained is lower than the 2-year spot interest rate. Could this be interpreted as follows: the final return obtained by an investor that invests for two years is higher than the final return obtained by an investor that invests for 3 years? (e) Compute the forward interest rate between year 1 and year 2 , ie. compute 0F1,2. (f) Compute the interest rate 0F1,3 and 0F2,3. A.3. You read in a newspaper the following information about the prices of different Spanish Treasury bonds: Table 1: Treasury Bond Prices The face value of Spanish Treasury bonds is 1,000 and the repayment is at par. The bond rating is AA. You furthermore read that AA bonds pay a risk premium of 0.4 percentage points above AAA bonds. (a) How do you define the yield curve? (b) Is it possible to know with the information provided if the yield curve is upward sloping or downward sloping? Draw it in a graph. (c) Compute the 2-year spot interest rate. (d) Compute the 3-year spot interest rate. Suppose that 3-year spot interest rate that you obtained is lower than the 2-year spot interest rate. Could this be interpreted as follows: the final return obtained by an investor that invests for two years is higher than the final return obtained by an investor that invests for 3 years? (e) Compute the forward interest rate between year 1 and year 2 , ie. compute 0F1,2. (f) Compute the interest rate 0F1,3 and 0F2,3