You have estimated spot rates as follows:

Year Spot Rate

1. 4.19%

2. 4.23%

3. 4.70%

4. 4.95%

5. 4.98%

1. a) What are the discount factors for each date (that is, the present value of $1 paid in year t)? Please express to 4 decimal places

2. b) Calculate the PV of the following Treasury notes (with face value 100):

   1. 4% annual coupon bond, 3-year note

   2. 5% annual coupon bond, 5-year note

   3. 6% annual coupon bond, 3-year note

3. c) Explain intuitively why the yield to maturity on the 6% bond is less than that on the 4% bond.

4. d) What should be the yield to maturity on a 4-year zero-coupon bond?

5. e) Some years ago, you bought a 5% coupon bond with a face value of 100 that had a YTM

of 6% and 10 years left until maturity at that time. Suddenly you are forced to sell the bond

today at the market price of 92. What is your capital gain/loss? (5 points)