Provide correct answers to the questions in the attched document.
The following are the current coupon yields to maturity and spot rates of interest
YIELDS TO MATURITY AND SPOT RATES OF INTEREST Spot Rate Term to Maturity of Interest 1-year Treasury 5.25% 2-year Treasury 5.79 3-year Treasury 6.19 4-year Treasury 6.34 5-year Treasury 6.51 10-year Treasury 7.10 30-year Treasury 7.67
A.
Compute the three-year implied forward rate two years from now, given the information provided in preceding table. State the assumption underlying the calculation of the implied forward rate (6 marks)
B.
What is the value of a 5-year, 6.5% coupon Treasury note. Interest paid annually Assume $100 par value. (6 marks)
C.
If the price of 6-year, 7% coupon Treasury security is $98.00. What is the theoretical 6-year spot rate? Interest paid annually. (6 marks)
Question 5 [16 marks]
A.
Assume that you purchase a 4-year $1,000 par value bond, with an 8% coupon. and a yield of 10%. After you purchase the bond, one-year interest rates are as foilow, year 1 = 10%, year 2 = 11%, year 3 = 12% (these are the reinvestment rates). Calculate the realized horizon yield if you hold the bond to maturity. Interest is paid annually. (6 marks)
B.
A $1,000, 7%, 25-year bond has a yield of 5.5%. If the yield remains unchanged how much will the bond value increase by in the next three years? Assume interest is paid semi-annually. (5 marks)
C.
How you would use a zero-coupon bond to immunize a bond portfolio? Discuss why a zero-coupon bond is an ideal instrument in this regard. (5 marks)
