Suppose we see the following prices for zero coupon bonds with maturities ranging from one to six years:

Maturity in Years Bond Price

1 $98.04

2 $95.18

3 $92.18

4 $89.28

5 $86.52

6 $83.90

Note: Each bond has a face value of $100

a) What do you expect the five-year spot rate to be one year from now? Please report the annual rate.

b) What is the yield-to-maturity of a six-year coupon bond that has a face value of $1,000 and an annual coupon rate of 8%? The coupons are paid annually.

c) What is the (Macaulays) duration of the bond introduced in part (b)? Whats the economic meaning of duration? How can you interpret its weights?

d) How much would the price of the bond change if the yield increased by 1%?