The following table shows the prices of a sample of U.S. Treasury strips in August 2009. Each

Question:

The following table shows the prices of a sample of U.S. Treasury strips in August 2009.

Each strip makes a single payment of $1,000 at maturity.

a. Calculate the annually compounded, spot interest rate for each year.

b. Is the term structure upward- or downward-sloping, or flat?

c. Would you expect the yield on a coupon bond maturing in August 2013 to be higher or lower than the yield on the 2013 strip?

Maturity Price (%)

August 2010 .........99.423

August 2011 .........97.546

August 2012 .........94.510

August 2013 .........90.524

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...