You observe the yields of the Treasury securities below (all yields are shown on a bond-equivalent basis, twice the semiannual bond yields):

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 ? a. Calculate the missing spot rates. b. What is the 6-month forward rate starting in the third year?

Keys:

Calculate the missing spot rates. Year (Period) Yield to Maturity Spot Rate 0.5 (1) 5.25% 5.25% 1.0 (2) 5.50% 5.50% 1.5 (3) 5.75% 5.76% 2.0 (4) 6.00% 6.02% 2.5 (5) 6.25% 6.28% 3.0 (6) 6.50% 6.55% 3.5 (7) 6.75% 6.82% 4.0 (8) 7.00% 7.10%4.5 (9) 7.25% 7.38% 5.0 (10) 7.50% 7.67% b. What is the 6-month forward rate starting in the third year? 8.45%