We see the following yield curve for discount, or zero-coupon, bonds.

Maturity Yield to Maturity

1 year 6%

2 years 7%

3 years 8%

(a) If the fair price for a 4-year annuity paying $100 per year is $334.57, what is the yield to maturity on a four year zero-coupon bond? (b) Suppose that you wish to lock in a loan in year 2 to be repaid in year 3 (cash received in year 2 and interest plus principal returned in year 3). The amount of the loan is $20 Million. What pattern of discount bond holdings could you use to construct this loan now? That is, you will be buying and selling different bonds. How many bonds of what maturity will you buy? How many bonds of what maturity will you sell? (c) What is the implied forward rate between year 2 and year 3?