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The maturities and yields of three zero-coupon bonds are as follows: Maturity YTM 1 4% 2...

The maturities and yields of three zero-coupon bonds are as follows:

Maturity YTM
1 4%
2 5%
3 6%

What is the forward rate for year 3, that is, the 1-year rate two years from now? Please express your answer in percent rounded to the nearest basis point.

Solutions

Expert Solution

Maturity YTM
1. r1 4%
2. r2 5%
3. r3 6%

2f1 = (1 + r3)3/(1 + r2)2 - 1

2f1 = (1 + 0.06)3/(1 + 0.05)2 - 1

2f1 = 1.191016/1.1025 - 1

2f1 = 1.0802866213 - 1

2f1 = 0.0802866213

2f1 = 8.02866213%

2f1 = 8.03%

The 1-year rate two years from now is 8.03%

jeff jeffy answered 2 years ago
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