U.S. Treasuries represent a significant holding in many pension portfolios. You decide to analyze the yield curve for U.S. Treasury notes.

a. Using the data in the table below, calculate the 5-year spot and forward rates assuming annual compounding. Show your calculations.

b. Define and describe each of the following three concepts:
i. Short rate
ii. Spot rate
iii. Forward rate
Explain how these concepts are related.
c. You are considering the purchase of a zero-coupon U.S. Treasury note with 4 years to maturity. Based on the above yield-curve analysis, calculate both the expected yield to maturity and the price for the security. Show yourcalculations.

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U.S. Treasury Note Yield Curve Data Calculated Spot Rates 5.00 5.21 6.05 7.16 Calculated Forward Rates Par Coupon Yield to Maturity 5.00 5.20 6,00 7.00 7.00 Years to Maturity 5.00 5.42 7.75 10.56 4