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4, (10 pints) Assume the following term structure of spot rates: y1=1.55%,y2= 1.82%, and y3=2.03%. Use the return-to-maturity Expectations Theory to calculate the implied expected one-period spot rates E(y1) and E(y1). Also, calculate the implied expected two-period spot rate E(y2) 5, (10 points) Assume y1=1.5%, and also assume that the one-period spot rate next period can take the following two values with equal probability: y1u=1.75%+=1.75%+0.5% and y1d=1.75%=1.75%0.5%. If Local Expectations Theory holds, calculate y2,E(y1), and f11. 6, (10 points) Consider investment in three STRIPS (M=100), the first STRIPS matures in six months, the second STRIPS matures in 12 months, the third STRIPS matures in 18 months. The price of the first STRIPS is 98:12 (so y1=1.6518% ), the price of the second STRIPS is 96:20 (so y2=1.7315% ), and the price of the third STRIPS is 94:26(y3=1.7915% ). Based on the spot rates above, calculate the implied forward rates f11 and f21. Assume the unbiased Expectations Theory holds, so E(y1)=f11 and E(y2)=f12. Also, assume that realized future spot rates match the expectations: y1=f11 and y2=f12. Calculate the oneperiod realized rates of return on the three STRIPS (i.e., buy the bond today and sell it six months later)

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