The three U.S. Treasury bonds described below are traded in the market and pay annual coupons.

Assume that the par amount for each bond is $100.

Bond Maturity (Yr) Coupon Rate (%)

Bond A) Year 1: 3.5%

Bond B) Year 2: 5.0%

Bond C) Year 3: 4.5%

Assume that the 1-year interest rate is 3%, the 2-year interest rate is 4%, and the 3-year interest rate is 5%.

(a) Write out each bonds cash flow for each year.

(b) Find each bonds price.

(c) Suppose the Treasury plans to issue a new 3-year note with a $1,000 face value and annual coupons. What coupon rate would they need to set for the bond to initially trade at a price of $1,000?