Calculate the zero coupon spot rates

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1.Suppose the two-year spot rate in one year is 11.53% and the two-year spot rate in two years is 14.08%. Further assume that the liquidity preference theory holds and the liquidity premium is constant at 1%. What is the expected two-year forward rate in one year? And what is the expected two-year forward rate in two years?
2. A corporate bond paying a 10% coupon rate with semi-annual payments is currently selling at par. What interest rate would have to be offered on a bond (also selling at par) of similar risk that only paid annually to make you indifferent between the two bonds
3.Rank the following three debt securities in terms of lowest EFFECTIVE annual interest rate to largest.
a. A one year zero paying 8%
b. A one year corporate bond selling for par paying semi-annual payments with a (annual) coupon rate of 8%
c. A three month treasury bill selling at $98,000 with a par value of Y$100,000.
4. You observe the following prices in the WSJ for zero coupon bonds
Maturity (years) Price
1 952.38
2 890.00
3 816.30

a. Calculate the zero coupon spot rates that must accompany these bonds
b. Calculate one year forward rates implied by this data, 1f2 and 2f3

Reference no: EM13517888

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