The spot rates of interest for five U.S. Treasury Securities are shown in the following exhibit. Assume all securities pay interest annually.
|
Spot Rates of Interest |
|
|
Term to Maturity (years) |
Spot Rate of Interest |
|
1 |
13.00% |
|
2 |
12.00 |
|
3 |
11.00 |
|
4 |
10.00 |
|
5 |
9.00 |
a. i. Compute the 2 year implied forward rate for a deferred loan beginning in 3 years.
ii. Explain your answer by using the expectations theory.
b. Compute the price of a 5 year annual pay Treasury security with a coupon rate of 9% by using the information in the exhibit.