Posted: September 21st, 2016

What spot and forward rates are embedded in the following treasury bonds

A) What spot and forward rates are embedded in the following treasury bonds? The price of one-year (zero coupon) treasury bills is 93.46 percent. Assume for simplicity that bonds make one annual payment. Hint: Can you devise a mixture of long and short positions in these bonds that gives a cash payoff only in year 2? In year 3?

Coupon (%) Maturity (years) price (%)

4 2 94.92
8 3 103.64

B). A three-year bond witha 4 percent coupon is selling at 95.00 percent. Is there a profit opportunity here? If so, how would you take advantage of it?