Read First* - Please take your time!! The answers to the first questions are: Period 3 - 2.503412, Period 4 - 4.8904, Period 5 - 2.7068, Period 6 - 3.1053

Please show the work to getting these answers for question 1 as they are needed for answering question 2. For the first question you need to use a present value formula for compounding once a year rather than continous compunding.

The second question you need to use the forward rate formula

Assume the following par yields for the on-the-run Treasury yield curve.

Date                 Period              Years               Par Yield = coupon rate

2/15/2014        1                      0.5                   2.10% (BEY of 6-month T-bill)

8/15/2014        2                      1.0                   2.30% (BEY of 1-year T-bill)

2/15/2015        3                      1.5                   2.50%

8/15/2015        4                      2.0                   2.70%

2/15/2016        5                      2.5                   3.00%

8/15/2016        6                      3.0                   3.40%

1. Calculate the spot rate curve from the par yield curve using bootstrapping. Show all calculations and include six decimal places.

2. Calculate the 1-year (2-period) forward rate 1 year (2 periods) from today and the 1-year (2-period) forward rate two years (4 periods) from today. Use the spot rate curve you calculated in problem 1. above. Show all calculations and include six decimal places.