Problem:
Suppose you observe a 1-year zero-coupon Treasury security trading at a yield to maturity of 5%. You also have a 2-year T-note with a 6% coupon trading at a yield to maturity of 5.5%. And, finally, you observe a risk-free 3-year annuity with an annuity yield (a3) of 5.68%.
Required:
Question 1: Assuming annual coupon payments, what is the 2-year (y2) and 3-year (y3) spot rates?
Question 2: What is the yield to maturity (YTM) for a three-year 5% coupon bond?
Points up in detail clarify all workings.