From Federal Reserve Economic Data (FRED), we have obtained spot zero rates as follows: Spot zero Year rate 0.5 2% 1 3% 1.5 2 4% 2.5 ? 3 5% We want to calculate the price of a 3-year bond which pays 10% coupon (semi-annual). The face value of the bond is $1,000. However, the problem is that we do not know 1.5-year and 2.5-year spot zero rates. If we use linear interpolation method, what are the 1.5-year and 2.5-year spot zero rates? The 1.5-year spot rate is 3.50% and 2.5-year spot rate is 4.50% The 1.5-year spot rate is 1.75% and 2.5-year spot rate is 2.25% The 1.5-year spot rate is 1.70% and 2.5-year spot rate is 2.20% The 1.5-year spot rate is 3.40% and 2.5-year spot rate is 4.40%

Suppose that the current one-year rate (one-year spot rate) and expected one-year government bonds over years 2, 3 and 4 are as follows: 1R1 = 4.80%, E(2r1) = 5.45%, E(3r1) = 5.95%, E(4r1) = 6.10% Assume that there are no liquidity premiums. To the nearest basis point, what is the current rate for the four-year-maturity government bond? 5.57% 5.62% 5.83% 6.10%

The yield curve currently observed in the market is as follows: y1 = 7%, Y2 = 8%, and yz = 9%. You are trying to decide between buying a two-year bond (Bond A) and three-year bond (Bond B), each of which is default-risk free and pays annual coupons of 8% per year. You strongly believe that yield curve in one year will become flat at 9%. Which one of the two bonds should you buy today if you plan to sell this bond in exactly one year (right after you receive the first coupon payment)? Assume interest is compounded annually, and each bond has a face value of $1,000. Bond B O Neither bond -- The expected total return of both bonds will be negative if interest rates increase to 9% in one year Bond A Both bonds provide the same return over a one year investment horizon A portfolio that invests 50% of your wealth in each bond provides the highest total expected return

Both Bond Bill and Bond Ted have 11.6 percent coupons, make semiannual payments, and are priced at par value. Bond Bill has 6 years to maturity, whereas Bond Ted has 23 years to maturity. Both bonds have a par value of 1,000. a. If interest rates suddenly rise by 3 percent, what is the percentage change in the price of these bonds? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. If rates were to suddenly fall by 3 percent instead, what would be the percentage change in the price of these bonds? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)