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Suppose that we have two Treasury securities traded in the market, and we need to use them to calculate the theoretical spot rates. The first
Suppose that we have two Treasury securities traded in the market, and we need to use them to calculate the theoretical spot rates. The first Treasury is a one-year zero, which pays $1,000 at t=1, and the current price is $990. The second Treasury is a two-year maturity, 5% coupon bond, and its current price is $950. Assume annual coupon payments. The par value of the second Treasury is $1,000. What is the two-year spot rate?
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