You have estimated spot rates as follows: (a) What are the discount factors for each date (that

Question:

You have estimated spot rates as follows:

(a) What are the discount factors for each date (that is, the present value of $1 paid in year t)?

(b) What are the forward rates for each period?

(i) 5 percent, two-year note.

(ii) 5 percent, five-year note.

(iii). 10 percent, five-year note.

(d) Explain intuitively why the yield to maturity on the 10 percent bond is less than that on the 5 percent bond.

(e) What should be the yield to maturity on a five-year zero-coupon bond?

(f) Show that the correct yield to maturity on a five-year annuity is 5.75 percent.

(g) Explain intuitively why the yield on the five-year Treasury notes described in part (c) must lie between the yield on a five-year zero-coupon bond and a five-year annuity

Annuity
An annuity is a series of equal payment made at equal intervals during a period of time. In other words annuity is a contract between insurer and insurance company in which insurer make a lump-sum payment or a series of payment and, in return,... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...