Current 1-year spot rate is 3.5%. Annual volatility of interest rates is 10%. If r₁=4.5%, calculate the price of a 2-year bond with annual 3% coupon (paid annually). Assume face value of $100.

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Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.