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U.S. Treasuries represent a significant holding in many pension portfolios

U.S. Treasuries represent a significant holding in many pension portfolios



Question 1:
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
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Years to Par Coupon Calculated Calculated
Maturity Yield-to-Maturity Spot Rates Forward Rates
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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 - -
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(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.
Question 2:
The yield to maturity on one-year- maturity zero coupon bonds is 5% and the yield to maturity on
two-year-maturity zero coupon bonds is 6%. The yield to maturity on two-year-maturity coupon
bonds with coupon rates of 12% (paid annually) is 5.8%. What arbitrage opportunity is available
for an investment banking firm? What is the profit on the activity?




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28 Apr 2016

Answers (1)

  1. Genius

    U.S. Treasuries represent a significant holding in many pension portfolios

    U.S. Treasuries represent a significant holding in many pens ****** ******
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