U.S. Treasuries represent a significant holding in many pension portfolios. You decide to analyze the yield curve for U.S. Treasury notes.
a. Using the data in the table below, calculate the 5 year spot and forward rates assuming annual compounding. Show your calculations.
U.S. Treasury Note Yield Curve Data
|
Years to Maturity |
Par Coupon Yield to Maturity |
Calculated Spot Rates |
Calculated Forward Rates |
|
1 |
5.00 |
5.00 |
5.00 |
|
2 |
5.20 |
5.21 |
5.42 |
|
3 |
6.00 |
6.05 |
7.75 |
|
4 |
7.00 |
7.16 |
10.56 |
|
5 |
7.00 |
? |
? |
b. Define and describe each of the following three concepts:
i. Yield to maturity.
ii. Spot rate.
iii. Forward rate.
Explain how these concepts are related.
c. You are considering the purchase of a zero coupon U.S. Treasury note with 4 years to maturity. Based on the above yield curve analysis, calculate both the expected yield to maturity and the price for the security. Show your calculations.