Since the price of the 2year coupon treasury security

Since the price of the 2–year coupon Treasury security is equal to par, the above sum must equal
the bond price which is $100. Therefore,
1 . 95
(1 . 0150)
1
+
1 . 95
(1 . 0165)
2
+
1 . 95
(1 . 017527)
3
+
101 . 95
(1 + z
4
)
4
= 100
The solution is z
4
= . 019582 = 1 . 9582% . Doubling this yield, we obtain the theoretical 2–year spot
rate bond-equivalent yield of 3 . 9164% .
Q9–
The plot represents the term structure of default–free spot rate for maturities up to 2 years .
Based on the limited data provided, what can you say the slope of the yield curve? (5pts.)
Q10–
Note: The coupon rate and the discount rate are the same in this problem.
. 06 × $1 , 000
2
= $30
Determine the present value of the coupon payments. (5pts.)
. 03
The above number tells us how much the coupon payments contribute to the bond’s value.
Determine the contribution of the bond’s maturity value to the bond’s value. (5pts.)
Determine the type of the bond. (5pts.)
Determine the price of this bound after 18 and 30 months respectively. (5pts.)
4

The T–notes bond prices will rise. The yield, being inversely related to price, will drop .
Q12–
T .
Q13–
F .
Q14–
d =
1
1 + r
= ⇒ r = 20%
Q15–
T .
Q16–
2, 3, 5, 7, and 10–year notes & 30–year bonds pay coupons .
1–month, 3–month, 6–month, and 1–year bills do not pay coupons .
Q17–
The spread or the difference between the two rates is 6 . 5% - 5 . 4% = 1 . 1%. Expressed in basis point,
the spread is 1 . 1 × 100 = 110 basis points .
5