The one-year interest rate is 2%. Bond A has two years to maturity, a

coupon rate of 5% and is priced at $983.52. Bond B has three years to

maturity, a coupon rate of 10% and is priced at $970. Assume all coupons

are paid annually and that the prices given are for bonds with face value

equal to $1,000.

a. Infer the US spot rate curve from these data.

b. Give an explanation, based on term structure theories that you know

of, for the shape taken by the term structure that you have derived.

c. Bond C has a coupon rate of 15%, three years to maturity and also

has a face value of $1,000. What is its fair price?

d. Using the example of bond C above, describe how you would estimate

its yield to maturity. [Note: you do not need to calculate its yield

to maturity]. How would you use and interpret the yield to maturity?

Do you believe that the yield is a good measure of the likely return

from holding the bond?