Suppose that 1-year spot rate is 5%. 2-year coupon bond with annual coupon of 6% trades at par in the market (i.e. price = face value).

Questions:

a) Is the 2-year spot rate higher or lower than 6%?

b) Calculate the 2-year spot rate.

c) Now suppose that there is another 2-year coupon bond with an annual coupon of 7%. What should be its price?