You observe the yields of the Treasury securities at the top of the next page (all yields are shown on a bond-equivalent basis). All the securities maturing from 1.5 years on are selling on par. The 0.5- and 1.0-year securities are zero-coupon instruments. (a) Calculate the missing spot rates. Plot the spot rates against the year and comment on the curve. (b) What should be the fair price of a 4% coupon rate four-year Treasury security with face value of $1000 be? (c) What should be the fair price of a 6% coupon rate six-year Treasury security with face value of $1000 be? You are planning to sell this bond after 3 years. What would be your realized rate of return?

What are all six-month-interval forward rates for a contract starting exactly at the beginning of the third year? Plot these forward rates against the six-month- interval year times and comment on the shape of the curve.

Year Yield to Maturity (%) Spot Rate (%) 0.5 5.25 5.25 1.0 5.50 5.50 1.5 5.75 5.76 2.0 6.00 ? 2.5 6.25 ? 3.0 6.50 ? 3.5 6.75 ? 4.0 7.00 ? 4.5 7.25 ? 5.0 7.50 ? 5.5 7.75 7.97 6.0 8.00 8.27 6.5 8.25 8.59 7.0 8.50 8.92 7.5 8.75 9.25 8.0 9.00 9.61 8.5 9.25 9.97 9.0 9.50 10.36 9.5 9.75 10.77 10.0 10.0 11.20 Year Yield to Maturity (%) Spot Rate (%) 0.5 5.25 5.25 1.0 5.50 5.50 1.5 5.75 5.76 2.0 6.00 ? 2.5 6.25 ? 3.0 6.50 ? 3.5 6.75 ? 4.0 7.00 ? 4.5 7.25 ? 5.0 7.50 ? 5.5 7.75 7.97 6.0 8.00 8.27 6.5 8.25 8.59 7.0 8.50 8.92 7.5 8.75 9.25 8.0 9.00 9.61 8.5 9.25 9.97 9.0 9.50 10.36 9.5 9.75 10.77 10.0 10.0 11.20