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Construct the term structure of interest rates

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Consider the following risk-free T-bill and coupon bonds available for sale in the bond market (assume annual coupons):

Maturity (in years)

Price

Coupon rate

1

999

T-bill (zero coupon bond)

2

1003

2%

3

1008

3.5%
  1. Construct the term structure of interest rates for these three years.
  2. Find forward rates between years 1 and 2, and between years 2 and 3.
  3. Suppose that your company plans to issue a one-year zero-coupon bond in year 1 that will mature in year 2. What is the expected price of this bond?

Reference no: EM133070665

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