The following table shows the prices of a sample of U.S. Treasury strips in February 2012. Each

Question:

The following table shows the prices of a sample of U.S. Treasury strips in February 2012. Each strip makes a single payment of $1,000 at maturity.

a. Calculate the annually compounded, spot interest rate for each year.

b. Is the term structure upward- or downward-sloping or flat?

c. Would you expect the yield on a coupon bond maturing in February 2017 to be higher or lower than the yield on the 2014 strip?

Maturity Price (%)

February 2014 ........99.523%

February 2015 ............98.937

February 2016 ............97.904

February 2017 ............96.034

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...