The Web sites of The Wall Street Journal (www.wsj.com) and the Financial Times (www.ft.com) are wonderful sources of market data. You should become familiar with them. Use www.wsj. com to answer the following questions:
a. Find the prices of coupon strips. Use these prices to plot the term structure. If the expectations theory is correct, what is the expected one-year interest rate three years hence?
b. Find a three- or four-year bond and construct a package of coupon and principal strips that provides the same cash flows. The law of one price predicts that the cost of the package should be very close to that of the bond. Is it?
c. Find a long-term Treasury bond with a low coupon and calculate its duration. Now find another bond with a similar maturity and a higher coupon. Which has the longer duration?
d. Look up the yields on 10-year nominal Treasury bonds and on TIPS. If you are confident that inflation will average 2% a year, which bond will provide the higher real return?
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