Provide correct answers to the questions in the attched document.

Assume the following spot rates, as bond equivalent yields (BEYs) Years to Maturity 0.5 1.0 1.5 2 Spot Rates 4.00 4.40 5.00 5.40 What is the 6-month forward rate I .5 years from now? What is the I-year forward rate 0.5 years from now? (4 marks) (4 marks) ii. iii. iv. What is the value of a 2-year, 5% coupon Treasury note. Interest paid semi-annually. Assume $100 par value. (5 marks) If the price of 2.5-year, 6% coupon Treasury security is $97.5(). What is the theoretical 2.5-year spot rate? Interest paid semi-annually. (5 marks) Question 5 [16 marks] a) b) c) Assume that you purchase a 3-year $1,000 par value bond, with a 9% coupon, and a yield of 8%. After you purchase the bond, one-year interest rates are as follow, year I = 9%, year 2 = 10%, year 3 = 11% (these are the reinvestment rates). Calculate the realized horizon yield if you hold the bond to maturity. Interest is paid annually. (6 marks) An investor in the 28 percent tax bracket is trying to decide which of two bonds to purchase. One is a corporate bond carrying an 8 percent coupon and selling at par. The other is a municipal bond with a 5.5 percent coupon, and it, too, sells at par. Assuming all other relevant factors are equal, which bond should the investor select? Show working. (5 marks) How would you use a zero coupon bond to immunize a bond portfolio? Discuss why a (5 marks) zero coupon bond is an ideal instrument in this regard.