Assignment:
U.S. Treasuries represent a significant holding in many pension portfolios. You decide to analyze the yield curve for U.S. Treasury Notes.
(a) Using the data in the table below, calculate the five-year spot and forward rates assuming annual compounding. Show your calculations.
(Hint: the spot rates are yields to maturity for zero-coupon bonds; yields to maturity for coupon bonds selling at par will typically differ).
U.S. Treasury Note Yield Curve Data
|
Years to
|
Par Coupon
|
Calculated
|
Calculated
|
|
Maturity
|
Yield-to-Maturity
|
Spot Rates
|
Forward Rates
|
|
1
|
5.00
|
5.00
|
5.00
|
|
2
|
5.20
|
5.21
|
5.42
|
|
3
|
6.00
|
6.05
|
7.75
|
|
4
|
7.00
|
7.16
|
10.56
|
|
5
|
7.00
|
-
|
-
|
(b) Based on the above yield curve analysis, calculate both the expected yield to maturity and the price of a 4- year zero. Show your calculations.