5. (20') You observe the following Treasury yields (all yields are shown on a bond-equivalent basis): Yield to Maturity Spot Rate 10.00% Year 0.5 10% 1 9.75% 9.75% 1.5 9.50% 9.48% 2 9.25% ? All securities from 1.5 years on are selling at par. The 0.5-and 1.0-year securities are zero- coupon instruments. a) Calculate the missing spot rate. b) If the yield curve deviates a lot from the theoretical spot rate that we calculated; for example, the 2-year treasury note with 9.25% coupon has a higher yield than a package of zero-coupon instruments, what will happen?

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