Given the following spot yield curve:

Maturity Spot Rate 1 Year 6.0%

2 Years 6.5%

3 Years 7.0%

4 Years 7.5%

a. What is the equilibrium price of a four-year, 7% coupon bond making annual coupon payments and paying a principal of $100 at maturity?

b. Using implied forward rates, estimate the yield curve one year from the present

(one-year, two-year, and three-year spot rates).

c. What is the expected equilibrium price one year from now of a three-year, 7% annual coupon bond paying a principal of $100 at maturity?

d. What is the one-year expected rate of return from investing in the four-year, 7% coupon bond if your expectations are based on implied forward rates?

e. Using implied forward rates, estimate the yields for one-year and two-year spot rates two years from now.

f. Show that the expected rate from holding the four-year, 7% coupon bond for two years is equal to the two-year spot rate of 6.5%.