1. The Bank of England conducted an auction for selling its latest issue of government gilts. The table below gives the selling prices of the gilts for different maturities. All of them are zero coupon gilts and they are expected to pay 1,000 on maturity.

Guilt Duration

1 Year

2 Year

3 Year

5 Year

10 Year

Auction Price

961.54

898.63

847.77

799.10

760.32

1 year price is 961.54.and the rest follows

1. a. Derive and plot the bond yield curve implied by the above prices, assuming that if no bond expires at a specific year then the yield remains the same. (60%)
2. b. What information could an analyst obtain from the above yield curve? (40%)