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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