You are in charge of the bond trading and forward loan department of a large investment bank. You have following YTMs for five default-free pure discount bonds as displayed on your computer terminal. Years of maturity 1 2 3 5 10 YTMI 6% 6.5% 7% 6.5% 8% Where YTMi denotes the yield to maturity of a default-free pure discount bond maturing at the time. (A) A new summer intern from Harvard tells you that 3-year treasury notes will annual coupons of $100 and face value of $1,000 are trading for $1,000. Would you ask the intern to recheck the price of this coupon bond? If so, why? (B) What is the annualized forward interest rate between the end of year 3 and the end of year 5? In other words, what is the geometric average forward interest rate for years 4 and 5? (C) If the expected one-year short rate for year 2 (i.e., from year 1 to year 2) is 5%, then what is the liquidity premium for years 2?

You are in charge of the bond trading and forward loan department of a large investment bank. You have following YTMs for five default-free pure discount bonds as displayed on your computer terminal. Where YTMi denotes the yield to maturity of a default-free pure discount bond maturing at the time. (A) A new summer intern from Harvard tells you that 3-year treasury notes will annual coupons of $100 and face value of $1,000 are trading for $1,000. Would you ask the intern to recheck the price of this coupon bond? If so, why? (B) What is the annualized forward interest rate between the end of year 3 and the end of year 5 ? In other words, what is the geometric average forward interest rate for years 4 and 5 ? (C) If the expected one-year short rate for year 2 (i.e., from year 1 to year 2 ) is 5%, then what is the liquidity premium for years 2