Question 2 Consider the following three coupon bonds available for sale in the bond market (assume annual coupons): Maturity Price Coupon 1 year $997 3% 2 years $985 6% 3 years $990 8.5% a. Find the term structure of interest rates, implied by the above bond prices.

b. Suppose you wish to issue a three-year bond priced at $983. At what rate should you set the coupon on this bond to justify this price?

c. What is the yield to maturity on the bond in part b? d. If you wanted to issue a three-year zero-coupon bond, instead of a coupon bond, what would be its price?