Consider the following five hypothetical Treasury securities.
Maturity Yield to Maturity Price
0.50 3.25 -----
1.00 3.60 -----
1.50 3.90 100
2.00 3.95 100
2.50 4.40 100
Answer the following questions using these data. (10 points)
a. What is the implied 1.5 spot rate obtained using bootstrapping?
b. Compare your answer is part (a) to the 1.5 year par rate and explain the difference.
c. Why do we use rates on implied zeros rather strip rates to construct the spot curve?