Maturity Years to Maturity Ask Price Calculated Yield 5/15/2013 1 99.883 0.001171371 5/15/2014 2 99.387 0.003079164 5/15/2015 3 98.606 0.004690323 5/15/2016 4 97.163 0.007220998 5/15/2017 5 95.412 0.00943742 5/15/2018 6 93.143 0.011909399 5/15/2019 7 90.282 0.014711751 5/15/2020 8 86.905 0.017699133 5/15/2021 9 83.735 0.019919479 5/15/2022 10 80.612 0.021786194

Using the Strips price data above, calculate the yields for 1-year to 10-year Strips, in 1-year increments. Assume today is May 15th, 2012. Report the graph with yield on the y-axis and years to maturity on the x-axis. How do you interpret the current yield curve? Question 2

Suppose you work at an investment bank and want to construct a bond with a 4-year maturity and 8% coupon payments (paid annually), and a $1,000 face value. Your will assume that your firm’s bonds are riskless, and thus you can base the bond’s discount rates on U.S. Treasury Notes.

Maturity Years to Maturity Ask Price Coupon 4/30/2013 1 100.4453 0.625 4/30/2014 2 103.2031 1.875 4/30/2015 3 106.2422 2.5 4/30/2016 4 107.8594 2.625

Using the above “Treasury Quotes”, calculate the price at which your bond should sell. You will

have to calculate four different yields to use as the discount rates. Show how you calculated each yield. Assume today is April 30th, 2012. For simplicity, also assume that the Treasury Notes pay coupons annually.

Hint: you need Bootstrapping to calculate the yields at different maturities. For the one-year yield, you can use the formula