Table 1: C011 0 on Rates and Asked Prices of Four US Treasury bonds: Cou – on Rate Asked Price 11/30/2018 1.25 99.5313 4/30/2019 1 .625 99.375…

Problem 5

Continue to work with the bonds from Problem 4. Also use your answers to parts a, b and c of Problem 4 to answer the following questions:

  1. Find four first rates of the term structure of interest rates. Use bootstrapping method.
  2. Graph the first four rates of the term structure (annualized).
  3. Is term structure increasing or decreasing? Please provide the explanation for the main reason for the term structure being increasing or decreasing.
  4. Suppose that US Treasury plans to issue two-year coupon bonds, which pay semi-annual coupons. The coupon rate is set at 3% per year. What is the price of these bonds?

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