Question 2: BBC has just issued a new annual coupon bond that has 5 years to maturity, a coupon rate of 12% and trades at par at a price of $1000. You may assume that the yield-curve is flat.

c) The government has recently issued five series of zeroes (zero-coupon bonds) with 6 month, 1 year, 18 month, 2 year and 30 month maturity horizons. If the bonds have respective prices of $966.18, $929.58, $891.07, $851.48 and $811.53 bootstrap the 1 year, 18 month and 2 year forward 6 month rates.

d) Identify if the 6 month forward-rate curve you computed in c is in a state of backwardation, contango or is flat.