3. Suppose all government bonds have par value of $1000. There is only 1-year zero bond...

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3. Suppose all government bonds have par value of $1000. There is only 1-year zero bond in the market. The 2-year coupon bond and the 3-year coupon bond pay at the same coupon rate of 8%. Price Maturity (Years) 1 year zero bond 2-year coupon bond $927.64 $980.43 3-yearc coupon bond $967.29 a. What is the 1-year spot rate, 2-year spot rate and 3-year spot rate? b. Suppose now the government issues another a 3-year coupon bond with a 12% annual coupon rate, what would be the yield to maturity? c. If you are going to save some money to bank one year later for the next two years. You would like to sign a contract with the bank now to settle down the interest rates. What will be the predetermined interest rate in your contract for the former year and the latter year during the two years? 3. Suppose all government bonds have par value of $1000. There is only 1-year zero bond in the market. The 2-year coupon bond and the 3-year coupon bond pay at the same coupon rate of 8%. Price Maturity (Years) 1 year zero bond 2-year coupon bond $927.64 $980.43 3-yearc coupon bond $967.29 a. What is the 1-year spot rate, 2-year spot rate and 3-year spot rate? b. Suppose now the government issues another a 3-year coupon bond with a 12% annual coupon rate, what would be the yield to maturity? c. If you are going to save some money to bank one year later for the next two years. You would like to sign a contract with the bank now to settle down the interest rates. What will be the predetermined interest rate in your contract for the former year and the latter year during the two years?

Answer rating: 100% (QA)

To calculate the spot rates we can use the bond prices and the formula for present value a Calculati... View the full answer