a) Explain why it is inappropriate to use one yield to discount all the cash flows of a financial asset. b) What is meant by a spot rate? c) You observe the following Treasury yield curve (all yields are shown on a bond equivalent basis). All the securities maturing from 1.5 years on are selling at par. The 0.5-year and one-year securities are zero-coupon instruments. Assume a par value of 100. Calculate the missing spot rates. d) What is the price of the four-year Treasury security? Year Yield to Maturity Sport Rate 0.5 10.00% 10.00% 1.0 9.75 9.75 1.5 9.50 9.48 2.0 9.25 9.22 2.5 9.00 8.95 3.0 8.75 ? 3.5 8.50 ? 4.0 8.25 8.14 4.5 8.00 7.86 5.0 7.75 7.58 5.5 7.50 7.30 6.0 7.25 7.02 6.5 7.00 6.74 7.0 6.75 6.46 7.5 6.50 6.18 8.0 6.25 5.90 8.5 6.00 5.62 9.0 5.75 5.35 9.5 5.50 5.07 10.0 5.25 4.80 a) Explain why it is inappropriate to use one yield to discount all the cash flows of a financial asset. b) What is meant by a spot rate? c) You observe the following Treasury yield curve (all yields are shown on a bond equivalent basis). All the securities maturing from 1.5 years on are selling at par. The 0.5-year and one-year securities are zero-coupon instruments. Assume a par value of 100. Calculate the missing spot rates. d) What is the price of the four-year Treasury security? Year Yield to Maturity Sport Rate 0.5 10.00% 10.00% 1.0 9.75 9.75 1.5 9.50 9.48 2.0 9.25 9.22 2.5 9.00 8.95 3.0 8.75 ? 3.5 8.50 ? 4.0 8.25 8.14 4.5 8.00 7.86 5.0 7.75 7.58 5.5 7.50 7.30 6.0 7.25 7.02 6.5 7.00 6.74 7.0 6.75 6.46 7.5 6.50 6.18 8.0 6.25 5.90 8.5 6.00 5.62 9.0 5.75 5.35 9.5 5.50 5.07 10.0 5.25 4.80