1. Problem C,

   You are facing the following three pure discount (zero coupon) Treasury Bills and bond Strips:

   Bills and Bonds A B C

   Face ($) 1000 1000 1000

   Price ($) 915.667 889.996 851.614

   Maturity 6 months 12 months 18 months

   Semi-annual Spot Rate (%) 9.21 6.00 z₃ = ?

   You are also aware that a two years (4 coupons) to maturity bond bears a

   10% annual coupon and it trades at $1000 par value.

   The third (six-month) period Spot Rate (z₃) is (%)

   		a.5.50
   		b.5.00
   		c.6.00
   		d.6.50

1. The fourth (semi-annual) period Spot Rate (z₄) is (%)

   		5.50
   		4.90
   		5.10
   		4.70

An 18 months to maturity bond pays three semi-annual coupon of $50 each plus $1000 face at maturity. It is available for a price of $954.48. All our bonds are assumed free of default risk.

Considering the above spot rates, What will you gain (or lose) from purchasing this bond and selling the stripped cash flows?

		gain $15.52
		lose $ 21.63
		gain $ 21.63
		gain $ 30.00