Problem 5 You find the following spot rates (assume the rates are EARs):

1. R1 4.9%
2. R2 5.7%
3. R3 6.4%
4. R4 7.1%

a. What are the one year, two year, and three year forward rates in one year? b. What are the one year rates in two years and three years?

Problem 6 The term structure for zero coupon bonds is shown below. What is the yield to maturity of a 3 year bond with a $2,000 par value and an annual coupon rate of 6 percent? Assume annual interest rates.

Rate

1. 1 2.8%
2. 2 3.4%
3. 3 9%

Problem 7 The yield to maturity (YTM) on 1-year zero-coupon bonds is 5 percent and the YTM on 2-year zeros is 5.75 percent. The yield to maturity on 2-year-maturity coupon bonds with coupon rates of 12 percent is 5.8 percent. What arbitrage opportunity is available? What is the profit on the activity? Assume that all interest rates and coupons are annual.

Problem 8 The 6-month Treasury bill spot rate is 4 percent, and the 1-year Treasury bill spot rate is 5 percent. The rates are APRs with semiannual compounding. What is the implied 6-month forward rate for 6 months from now?