Calculate spot rate implied by the us treasury yield curve

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Reference no: EM132208177

Question -

(a) Calculate the 2-year spot rate implied by the US Treasury yield curve data based on two zero coupon US Treasury bonds of 1 and 2 years maturity, both priced at par, as shown below. Assume interest is paid semi-annually for purposes of this calculation. Show all calculations.

Years to Maturity	Current Coupon (YTM)	Spot Rate
1	7.5%	7.5%
2	8.0%	??

(b) Discuss why a spot-rate curve can be derived entirely from the current-coupon (yield-to-maturity) yield curve.

(c) Given a US Treasury 1-year spot rate of 9% and US Treasury 2-year spot rate of 9.5%, compute the implied 1-year forward rate for the 2-year US Treasury security with 1 year remaining to maturity. (Assume semi-annual interest payment.)

(d) Discuss why a 1-year forward rate of 9.6% would not be expected to prevail in a market given those spot rates in Question 3(c) above.

Reference no: EM132208177

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