The following treasury spot rates for the next 8 years are gathered from the market:

Maturity (Years)	Spot Rate
1	0.254%
2	0.787%
3	1.241%
4	1.563%
5	1.979%
6	1.544%
7	1.685%
8	1.432%

1. Based on these spot rates, find the following forward rates:

3y1y

5y1y

4y4y

3y5y

2y6y

6y2y

2. If you believe the interest rate 2 years from now on a treasury security that 8 years from now will be 1.5%, would you prefer to invest in an 8-year maturity now, or invest in a 2-year security and reinvest at the market rate for 6 years? Why?

3. Based on the forward rates, what is the implication for the economy in year 6? Describe an appropriate investment strategy.

4. A bond with a 8-year tenor has an annual coupon of 5%. The yield to maturity of the bond is 3.25%. Using this information as well as the spot rates above, compute the z-spread for the bond.

5. You purchased the above bond with a yield to maturity of 3.25%. In between the third and fourth coupon payment, interest rates fall and appropriate market rate/reinvestment rate is 2.75% (beginning with fourth coupon payment). Calculate the return if:

1. the bond is held to maturity;
2. the bond is sold immediately after the sixth coupon payment is received.