Question

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1. The following are the spot interest rates for 1- and 2-year fixed income securities. Spot...

1. The following are the spot interest rates for 1- and 2-year fixed income securities.

Spot 1 Year Spot 2 Year Forward 1Year (1 year maturity)

Treasury 3.0% 4.75% x

BBB Corporate Debt 7.5% 9.15% y

Calculate the value of x (the implied forward rate on 1-year maturity Treasury at the end of the year) and the value of y (the implied forward rate on 1 year maturity BBB corporate debt at the end of one year).

Expert Solution

Solution:

Spot 1 Year Spot 2 Year Forward 1 Year (1-year maturity)

Treasury 3.0% 4.75% x

BBB Corporate Debt 7.5% 9.15% y

The formula to calculate the forward rate is

For treasury

For BBB corporate debt

jeff jeffy answered 2 years ago

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