The spot rates of interest for five Canada bonds are shown in the following table. Assume all

Question:

The spot rates of interest for five Canada bonds are shown in the following table. Assume all securities pay interest annually.

Spot Rates of Interest

Term to Maturity (years) Spot Rate of Interest (%)

1............. 13.00

2............. 12.00

3............. 11.00

4 .............10.00

5............. 9.00

i. Compute the two- year implied forward rate for a deferred loan beginning in three years.

ii. Explain your answer by using the expectations theory.

b. Compute the price of a five- year annual-pay Canada bond with a coupon rate of 9 percent by using the information in the table.

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... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...