Suppose that the prevailing Treasury spot rate curve is the one shown in the table below (Note: I am not asking you to compute the spot rates using bootstrapping, I am already giving you the spot rates). Consider each period as six months, that is assume semiannual compounding.

Period	Spot Rate (%)
1	1.0000
2	1.2500
3	1.5000
4	1.7500
5	2.0000
6	2.2500

(a) What is the theoretical price of a 3.8% coupon 3-year Treasury issue considering a 1000 par?

(b) Suppose that this 3.8% coupon 3-year Treasury issue is priced in the market to yield 2%. What is the market price of this bond?

(c) Is this bond correctly priced, overpriced or underpriced?

Answer rating: 100% (QA)

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