1. This question is based on materials from Lecture notes - topic 4. Suppose that you invest in a 10-year 8% Treasury Note sold at par and the interest rate drops to 6% after your purchase. What will be the Total Dollar Return and the Realized Yield if you hold the bond (a) for 3 years; (b) for 7 years; (c) to maturity. In each case, decompose the Total Dollar Return into (1) Total Coupon Interest; (2) Interest on Interest; (3) Capital Gain / Loss. 2. Imagine that currently in the market the following bonds are available: Maturity Coupon Rate Price 0.3 5 97.087 1.5 8% $101.120 1.5 0% 5 89.900 20 0% $ 84.663 Maturity is in years, coupons are paid semiannually but quoted annually on a bond equivalent basis, and prices are quoted per $100 face value. (a) Construct a 2-year spot yield curve from this information. More precisely, calculate a spot rate for each six-month period. Report the rate on a bond equivalent basis. (b) In six months, your company plans to issue a 1.5 year zero coupon bond with a face value of $500,000 to finance a small acquisition. If the traditional expectations theory of the term structure is correct, and if the risk of your company's bonds is similar to that of the above bonds, what is the expected price of your company's bond at issue (ie., in six months hence)? (c) Having heard reports that interest rates could rise sharply in the next six months, you suggest to the CFO that the company issue the bond immediately, locking in current rates, and invest the proceeds in a six month bond. In other words, today you would issue a bond maturing in two years with a face value of $500,000