The following are the yields to maturity on Canada strip bonds with various years to maturity.

Years to Maturity Yield to Maturity(%)

1...................................................................1.26

2...................................................................2.00

3..................................................................2.47

4..................................................................2.79

5..................................................................3.02

a. Calculate the forward rate for each period.

b. Calculate the price today of the following Canada bonds:

i. 2-year $1,000 par value, 5% annual coupon, 2-year bond

ii. 5-year $1,000 par value, 5% annual coupon, 5-year bond

iii. 5-year $1,000 par value, 10% annual coupon, 5·year bond

c. Calculate the yields to maturity on each of the bonds in part (b).

d. Why is the yield to maturity on the 10% bond less than the yield on the 5%, 5·year bond?