a) Calculate the 2-year spot rate implied by the US Treasury yield curve data, based on two zero-coupon US Treasury bonds with a maturity of 1 and 2 years, both priced at par, as shown below. For the purposes of this calculation, suppose interest is paid semi-annually. Show all calculations.

Years to Maturity	Current Coupon (YTM)	Spot rate
1	%7,5	%7,5
2	%8.0	??

(b) Discuss why a spot rate curve can be derived entirely from a current coupon (yield to maturity) yield curve.

(c) Calculate the implied 1-year forward rate for a 2-year U.S. Treasury bond 1 year to maturity, given the US Treasury 1-year spot rate of 9% and the US Treasury 2-year spot rate of 9.5%. (Assume a semi-annual interest payment.)

(d) Discuss why a 9.6% forward rate can not be expected to dominate a market, given the spot rates in Question (c) above.

Answer rating: 100% (QA)

a The spot rate for a 2year US Treasury bond can be calculated using the following formula 1 spot rate for year 22 1 current yield to maturity for yea... View the full answer