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Year (t) 1 2 3 Bond Price (PV) Yield to Maturity (y,%) 4 Price (PV) Maturity (9,5) Spot rates 0.03 0.04 0.05 0.06 Discount factors

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Year (t) 1 2 3 Bond Price (PV) Yield to Maturity (y,%) 4 Price (PV) Maturity (9,5) Spot rates 0.03 0.04 0.05 0.06 Discount factors 0.9709 0.9246 0.5638 0.7921 Bond A (8% coupon) Payment (C) $80.00 1,080.00 PV (C) $77.67 998.52 $1.076.19 3.96 Bond B (8% coupon) Payment (C) $50.00 80.00 1,080.00 PV (C) $77.67 73.96 932.94 $1,084.58 4.90 Bond C (3% coupon) Payment (C) $50.00 80.00 80.00 1,080.00 PV (C) $77.67 73.96 69.11 855.46 $1,076.20 5.81 TABLE 3.6 The law of one price applied to government bonds. Refer to Table 3.6. If the spot interest rates change to the following downward-sloping term structure: r = 4.68, r2 = 4.4%, r3 = 4.28, and r4 = 4.0, answer the following. Assume face value is $1,000. a. Calculate the discount factors for each of the bonds listed in the table. (Do not round intermediate calculations. Round your answers to 4 decimal places.) Year Discount Factors b. Calculate bond prices and yields to maturity for each of the bonds listed in the table. (Do not round intermediate calculations. Round your "Bond Price" to 2 decimal places. Enter your "YTM" as a percent rounded to 3 decimal places.) Bond Price YTM (%) Bond A Bond B Bond C

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