Look again at Table 3.5. Suppose the spot interest rates change to the following downward-sloping term structure: r1 = 4.6%, r2 = 4.4%, r3 = 4.2% and r4 = 4.0%. Recalculate discount factors, bond prices, and yields to maturity for each of the bonds listed in the table.

TABLE 3.5

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Year (t) Bond Price (PV) Yield to Maturity ( y, %) 2 3 Spot rates 0.04 0.03 0.9709 0.9246 0.8638 0.7921 0.05 0.06 Discount factors Bond A (896 coupon) Payment (C) $80.00 1,080.00 PV (C) 7767 998.52 $1,076.19 3.96 Bond B (8% coupon) Payment (C) $80.00 80.1,080.00 $77.6773.6 932.94 $1,084.58 4.90 Bond C (8% coupon) Payment (C) 0.00 80.0 0.00 1,080.00 69.11855.46 $77.67 73.96 $1,076.20 5.81