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Question 13

Suppose that all investors have the following treasury interest rate expectations for the next 4 years. The one year zero rate today is 1.3%. Short term forward rates during year 2 (f_1-->2), year 3 (f_2-->3), and year 4 (f_3-->4) are expected to be 1.9%, 2.3% and 2.8% respectively. All rates have annual compounding.

Calculate the 2 year, 3 year and 4 year spot (i.e. zero) rates from the information give. Express your answers as a percent, rounded to 2 decimal places.

Two year spot rate is

Three year spot rate is

Four year spot rate is

(b) What is the price of a 3-year zero-coupon bond (a STRIP security) with a face value of $1,000?

(c) What is the price of a 2-year maturity T-bond with a 3% coupon rate, coupons paid annually, and face value of $1000.