Your lunch break is done – and you know need to return to your desk. Your boss has given you an assignment. The table below shows various bond prices at different maturity levels for zero coupon bonds. Based on this information, how would you describe the shape of the yield curve-is it: flat, upward sloping, downward sloping, generally flat or is there is not enough information present to make a determination? What does this shape mean? Note that the bonds all have $1,000 face value. (10 marks) maturity 1 price 950.24 900.70 860.38 3 4 820.27 6. Your boss is pleased – and your reward is more work. He asks you go address this question – the current yields for zero-coupon bonds with varying maturities are outlined in the table below. What is the forward rate from the end of year 2 to the end of Year 3? What does this rate denote? (5 marks) Yield Maturity (Years) 1 2 3 2.75% 3.25% 3.65% 4.00% 4.15% 4 5
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