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Corinne Mueller is explaining how to derive the theoretical Treasury spot rate curve from the prices of Treasury coupon bonds. She states the following:
Statement 1: To calculate a theoretical Treasury spot rate curve from the yields on coupon bonds, we must know at least two actual Treasury spot rates.
Statement 2: To compute the theoretical 3-year Treasury spot rate, first determine the spot rates for each of the bond’s coupon periods from 0.5 to 2.5 years. Discount each coupon payment to its present value using the theoretical spot rate for each period. The theoretical 3-year spot rate is the discount rate on the final coupon and principal payment that sets the sum of the present values of all the bond’s cash flows equal to its price.
With respect to Mueller’s statements: A. both are correct. B. only one is correct. C. both are incorrect. |