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Consider the following three risk-free government bonds: A, B, and C. All three bonds have a face value of 100 and pay annual coupons, but the coupon rates are different. Bond A has a coupon rate of 5%, B 10%, and C 8%. Both A and B mature in two years while C matures in three years. Bonds A, B, and C are currently trading at 100.91, 110.25, and 110.96, respectively. i. Calculate the 1-year, 2-year, and 3-year spot rate. What is the shape of the term structure? ii. Which theories of the term structure can explain the shape above? Explain the intuition. iii. Suppose that the unbiased expectation theory holds. What will the prices of Bonds A, B, and C be one year from today, right after making the annual coupon payment? iv. Consider a fourth bond, Bond D. It has a face value of 100, an annual coupon rate of 6%, four years to maturity, and its current yield to maturity is 4.5%. Calculate its current price and modified duration. Suppose that the yield to maturity suddenly drops from 4.5% to 3.5% today. Without calculating the new bond price, how much do you expect Bond D's price to change? Consider the following three risk-free government bonds: A, B, and C. All three bonds have a face value of 100 and pay annual coupons, but the coupon rates are different. Bond A has a coupon rate of 5%, B 10%, and C 8%. Both A and B mature in two years while C matures in three years. Bonds A, B, and C are currently trading at 100.91, 110.25, and 110.96, respectively. i. Calculate the 1-year, 2-year, and 3-year spot rate. What is the shape of the term structure? ii. Which theories of the term structure can explain the shape above? Explain the intuition. iii. Suppose that the unbiased expectation theory holds. What will the prices of Bonds A, B, and C be one year from today, right after making the annual coupon payment? iv. Consider a fourth bond, Bond D. It has a face value of 100, an annual coupon rate of 6%, four years to maturity, and its current yield to maturity is 4.5%. Calculate its current price and modified duration. Suppose that the yield to maturity suddenly drops from 4.5% to 3.5% today. Without calculating the new bond price, how much do you expect Bond D's price to change

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