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Suppose the term structure of interest rates is as follows: Term 1 yr 2 yr 3 yr 4 yr Annual Spot rate 4% 6.2% 8%

Suppose the term structure of interest rates is as follows:

Term 1 yr 2 yr 3 yr 4 yr

Annual Spot rate 4% 6.2% 8% 10%

(a) Find the price of a 3-year $100 par value bond with 7% annual coupons and redemption

value of $112. Round to the nearest cent.

(b) Find the annual eective yield of the bond described in (a).

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