Question 2: Term Structure of Interest Rates. Your investment company's trading system has become unstable after a recent update so that your superiors ask you to verify the calculations displayed on the traders' screens (The attached screenshot)

(a) Using current UST security information from Bloomberg reproduced above, you extract

the relevant spot rates by hand and fill in the remainder of the table to verify the

computations of your system. Note that the maturities are exactly as stated.

You might want to provide the requisite formulae indicating your exact calculations to

convince your boss that it is not you who is at fault but rather the IT techs who botched

the update.

(b) Draw the corresponding UST discount yield curve and indicate a hypothetical AAA

corporate term structure (sketch) relative to the US TSIR.

(c) What is the relationship between the US sovereign and corporate AAA yield curves?

What explains the difference in yields by maturity and how do markets use this information?

(d) The FRB has announced in December 2016 that it will cease to intervene in bond markets

and bring its policy of quantitative easing to an end. What will the effect of the Fed's

tapering announcement on the yield curve be? Explain

Type Maturity Coupon Price Spot Yield Disc Factor Fwd Rate UST Bill 182D 99.9650 UST P-Strip 1Y 99.9000 UST Note 1.5Y 2.30 100.0152 UST Note 2Y 3.80 100.1403