Question: 2. (9 marks) The term structure for zero-coupon bonds is currently: Maturity (years) 1 2 YTM (%) 4% 5% (a) (3 marks) Calculate the price

2. (9 marks) The term structure for zero-coupon bonds is currently:

2. (9 marks) The term structure for zero-coupon bonds is currently: Maturity (years) 1 2 YTM (%) 4% 5% (a) (3 marks) Calculate the price for a 2-year Treasury bond, paying annual coupons at 6%. The face value of the bond is $1000. (b) (3 marks) If the expectations theory of the yield curve is correct, what is the market expec- tation of the price for which the bond will sell next year? (c) (3 marks) Recalculate your answer to part (b) if you believe in the liquidity preference theory and you believe that the liquidity premium is 0.5%

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