Infer the us spot rate curve from data

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The one-year interest rate is 2%. Bond A has two years to maturity, a coupon rate of 5% and is priced at $983.52. Bond B has three years to maturity, a coupon rate of 10% and is priced at $970. Assume all coupons are paid annually and that the prices given are for bonds with face value equal to $1,000.

a. Infer the US spot rate curve from these data.

b. Give an explanation, based on term structure theories that you know of, for the shape taken by the term structure that you have derived.

c. Bond C has a coupon rate of 15%, three years to maturity and also has a face value of $1,000. What is its fair price?

d. Using the example of bond C above, describe how you would estimate its yield to maturity. [Note: you do not need to calculate its yield to maturity]. How would you use and interpret the yield to maturity? Do you believe that the yield is a good measure of the likely return from holding the bond?

Reference no: EM132602470

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