Suppose that one-to-six year bond rates are 2.35%, 2.65%, 2.95%, 3.55%, 4.15% and 4.25%, respectively, and...

Suppose that one-to-six year bond rates are 2.35%, 2.65%, 2.95%, 3.55%, 4.15% and 4.25%, respectively, and the liquidity premium for one-to-six year bonds are 0%, 0.15%, 0.25%, 0.35%, 0.45% and 0.55%, respectively. What is the estimate of the adjusted forward rate five years in the future?

a) 5.72%

b) 3.10%

c) 3.70%

d) 4.71%

Expert Solution

Ans is c) 3.70%

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