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Consider the following annually compounded (APR) yields:
1 Year Note 0.32%
2 Year Note 0.68%
5 Year Note 1.45%
10 Year Note 2.13%
Assuming all rates are quoted per annum (APR) with annual compounding and the notes have an annual coupon equal to the yield (i.e. are priced at par). Use linear interpolation to find the yield for each missing year. For instance, the yield for 3 years is 0.937%.
a) Find the missing yields for years 4, 5, 6, 7, 8 and 9.
b) Use the boot strap method to find the implied spot rate (zero-coupon) for years 2 through 10.
c) Find the one year forward rate for years 1 through 9 (at the beginning of each year for each of the 9 years).
How country risk affects NPV. Explain how the capital budgeting analysis in the previous question would need to be adjusted if there were three possible outcomes for the dollar along with the possible outcomes.
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