According to the term structure today, the implied forward rate between year 2 and 3 is...

According to the term structure today, the implied forward rate between year 2 and 3 is r0(2,3). Two years later, the spot rate r2(2,3) should be the same as the forward rate r0(2, 3). Otherwise, an arbitrage exists. Is this true or false?

Solutions

Expert Solution

False

Forward rate is the expected spot rate but the expectations might not fully realise. The final spot rate after 2 years will depend on the prevailing conditions.

jeff jeffy answered 2 years ago

Next > < Previous

Related Solutions

Currently the term structure is as follows: One-year spot rate 2% Two-year spot rate 3% Three-year...

Currently the term structure is as follows: One-year spot rate 2% Two-year spot rate 3% Three-year spot rate 4% You have a one-year investment horizon one-, two-, and three-year zero coupon bonds are available. a. Which bonds should you buy if you strongly believe that at year-end the term structure remains unchanged (i.e., one, two, and three year spot rates remain the same)? b. Redo part (a) assuming at year-end the term structure shifts as follows: One-year spot rate 6%...

Forward Rate. a. Assume that as of today, the annualized two-year interest rate is 0.1 ,...

Forward Rate. a. Assume that as of today, the annualized two-year interest rate is 0.1 , while the one-year interest rate is 0.07. Assume that the liquidity premium on a two-year security is 0.003. Use this information to re-estimate the one-year forward rate. Enter the answer in decimal form using 4 decimals (e.g. 0.1234)

Forward Rate. Assume that as of today, the annualized interest rate on a three-year security is...

Forward Rate. Assume that as of today, the annualized interest rate on a three-year security is 0.12, while the annualized interest rate on a two-year security is 0.03. Use only this information to estimate the one-year forward rate two years from now. Enter the answer in decimal form using 4 decimals (e.g. 0.1234)

Forward Rate. a. Assume that as of today, the annualized two-year interest rate is 0.11 ,...

Forward Rate. a. Assume that as of today, the annualized two-year interest rate is 0.11 , while the one-year interest rate is 0.02. Use only this information to estimate the one-year forward rate. Enter the answer in decimal form using 4 decimals (e.g. 0.1234)

Year Zero-coupon bond yield (Sport rate) Zero-coupon bond price 1-year implied forward rate Par coupon rate...

Year Zero-coupon bond yield (Sport rate) Zero-coupon bond price 1-year implied forward rate Par coupon rate 1 5% a 2 b c d 6% Please find out the values of a,b,c and d.

According to the liquidity premium theory of the term structure, a) the interest rate for each...

According to the liquidity premium theory of the term structure, a) the interest rate for each maturity bond is determined by supply and demand for that maturity bond. b) because buyers of bonds may prefer bonds of one maturity over another, interest rates on bonds of different maturities do not move together over time. c) because of the positive term premium, the yield curve will not be observed to be downward sloping. d) the interest rate on long-term bonds will...

The 3-year spot interest rate is 4.15%, the 3-year forward rate expected 3 years from now...

The 3-year spot interest rate is 4.15%, the 3-year forward rate expected 3 years from now has been estimated to be 4.15%. What is the other spot rate you need to know to find the forward rate given above using the pure expectations theory? Round to the nearest 0.01%. E.g., if your answer is 5.783%, record it as 5.78. The 8-year spot interest rate is 5.44%, the 2-year spot rate is 3.96%. What is the forward rate you can find...

Suppose an investor observes a downward term structure of interest rate. According to the expectation hypothesis,...

Suppose an investor observes a downward term structure of interest rate. According to the expectation hypothesis, what will be the investor’s forecast about future change of interest rate (increase, decrease or unchanged)? Explain your argument. (10 marks).

The following information is available as of today: the one-year forward rate (dollars per euro) is...

The following information is available as of today: the one-year forward rate (dollars per euro) is 1.50 ($/€) and the two-year forward rate (dollars per euro) is 2.00 ($/€). The interest rate per year for deposits in euro in the foreign country is R€ = 5.00%. A year from now your firm will generate $1.0 million that you intend to deposit in euros in the foreign country for one year. Two years from now you would like to repatriate the...

According to the expectations theory, what is the expected one-year treasury security rate (i.e. forward rate,...

According to the expectations theory, what is the expected one-year treasury security rate (i.e. forward rate, f) three years from today if today’s rates on treasury securities of different maturities are as follows: One-year US Treasury Note: 4.5% Two-year US Treasury Note: 4.8% Three-year US Treasury Note: 5.2% Four-year US Treasury Note: 5.3% Five-year US Treasury Note: 5.3%

Subjects