Reference no: EM132818070

Consider the information on a Treasury yield curve summarized below:

Term to maturity Yield to maturity

1 year 3%

2 year 4%

3 year 6%

All yields are for zero coupon bonds with face values of $100.

(a) Find the price of each bond.

(b) Using the pure expectation hypothesis, find the implied one-year forward rates: (f2), and (f3). Show all steps.

(c) If you expected one-year interest rates to equal 4% during year 2, how could you profit? Explain carefully.

(d) Are there other factors that investors might consider in addition to expected future interest rates when they evaluate bonds of different maturities? Explain.

(e) Is there an opportunity for pure arbitrage profit along the yield curve?