Question

In: Finance

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

  1. 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).

Solutions

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


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