Prices and spot interest rates What spot interest rates are implied by the following Treasury bonds? Assume for simplicity that the bonds pay annual coupons. The price of a one-year strip is 97.56%, and the price of a four-year strip is 87.48%.
To determine: The spot interest rates implied by treasury bonds.
Explanation of Solution
Determine
Hence,
Determine
Hence,
Determine
Determine
Solve equation 1 and 2
Determine
Hence, the spot rates are 2.50%, 3.22%, 3.09%, 3.40% and 3.60 for years 1 to 5.
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