The 1-year spot rate is 6%, the 2-year spot rate is 7%. The Treasury plans to issue 2-year maturity fixed coupon bonds with annual coupon payments, the coupon rate is 8% and face value of the bond is $100. Follow annual compounding. a. What price will the bond sell (using spot rates to calculate)?  b. What will the yield to maturity on the bond be?  c. If the expectations theory is correct, what will be the market’s expectation of the price the bond will sell one year from today?

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Treasury Market

On-the-run securities are the most recently issued securities in the market depth and are therefore traded at some premium. The off-the-run securities are the ones issued just before the most recent ones. The on-the-run securities have a lower yield to the investor than the off-the-run securities.