Question: Consider a 2-year bond whose par value is $1,000 and coupon rate is 6% per year, payable semi-annually. The bond's current price is $1,007.91. Suppose

  1. Consider a 2-year bond whose par value is $1,000 and coupon rate is 6% per year, payable semi-annually. The bond's current price is $1,007.91. Suppose also thatthe current term structure of spot interestrates is as follows:

Term (years)

 Rate (% p.a., continuous compounding)
0.50 4.445%
1.00 4.740%
1.50 5.060%

Under the UnbiasedExpectation Hypothesis, how much do you expect the six-monthspot rate to be in 18 months from now?

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