Problem 4

Table 1 below presents information on four US Treasury bonds, downloaded on April 30^th, 2018.

Table 1: Coupon Rates and Asked Prices of Four US Treasury bonds:

Maturity	Coupon Rate	Asked Price
11/30/2018	1.25	99.5313
4/30/2019	1.625	99.375
11/30/2019	1.5	98.5313
4/30/2020	1.125	97.3281

Use this information to answer the following questions:

a. Find the semi-annual coupon payment (in dollars) for each of these four bonds.

b. What is the dollar asked price of each bond?

c. Construct four timelines (one for each bond), showing dates when each payment of each bond is received. Assume that time zero (now) is May 1, 2018. Combine these time lines into a table. In this table, each row should show cash flows of one bond (the first row should show cash flows of the first bond, second row -- of the second bond, etc.) and each column shows cash flows received on the same date.

d. Find yields to maturity for these four bonds.

Problem 5

Continue to work with the bonds from Problem 4. Also use your answers to parts a, b and c of Problem 4 to answer the following questions:

1. Find four first rates of the term structure of interest rates. Use bootstrapping method.

2. Graph the first four rates of the term structure (annualized).

3. Is term structure increasing or decreasing? Please provide the explanation for the main reason for the term structure being increasing or decreasing.

4. Suppose that US Treasury plans to issue two-year coupon bonds, which pay semi-annual coupons. The coupon rate is set at 3% per year. What is the price of these bonds?