Scenario 1: assume that the risk-free rate is 4%. In 12 months' time, the central bank is expected to issue a large bond issue and, since demand for these instruments is limited, this is expected to drive bond prices down (and thus drive rates up). Assume that this is the only shock that rates will receive (i.e., they will remain constant before this event occurs, and they will also remain constant before this event). a) If you have investments in fixed income instruments, is the announcement of this shock good news or bad news? Justify b) Make a graph of spot rate (Y axis) vs. term (X axis). Scenario 2: you do not know what value the rate will take after 12 months, but you observe that there is a zero risk-free bond, with a 10-year term, 5% issue rate and face value of $1,000. The bond matures in 28 months and has just traded at $1,299.9576. c) Determine the 28-month spot rate. d) From the calculated spot rate, determine the forward rate from 12 to 28 months. Scenario 3: Assume there is a bond with equal annual coupons, face value $2,000, issue rate 8%, 6 equal semi-annual coupons and matures in 21 months. Given its risk level, a spread of 400 basis points (bp) is applied to this bond. e) How much would you be willing to pay for this bond? f) If you buy this bond and sell it in 3 months, just after paying the coupon, how much would you sell it for, and what return would you obtain from the operation?