Computing the forward rate

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1. The table below shows various bond prices at different maturity levels for zero-coupon bonds.  Based on this information, how would you describe the shape of the yield curve - is it: flat, upward sloping, downward sloping, generally flat or is there is not enough information present to make a determination? What does this shape mean? Note that the bonds all have a $1,000 face value.

maturity

price

1

950.24

2

900.70

3

860.38

4

820.27

2. The current yields for zero-coupon bonds with varying maturities are outlined in the table below. What is the forward rate from the end of year 2 to the end of Year 3? What does this rate denote?

Maturity (Years)

Yield

1

2.75%

2

3.25%

3

3.65%

4

4.00%

5

4.15%

3. Firm A issues ten-year bonds with a coupon rate of 6.5%, paid semi-annually. The credit spread for this firm's ten-year debt is 0.8%. New ten-year Treasury notes are being issued at par with a coupon rate of 5%. What should the price of the firm's outstanding ten-year bonds be per $100 of face value?

Reference no: EM133073533

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