Theannualized yield on a three year security is 12.1 percent; theannualized two year rate...

The annualized yield on a three year security is 12.1 percent; the annualized two year rate is 9.7 percent, while the one year interest rate is 8.3. what is the forward rate one year ahead (expected one year rate, one year from today)?

Expert Solution

Particulars	YTM	Values
YTM of 1 Year Bond Now	YTM 1	8.30%
YTM of 2 Year Bond Now	YTM 2	9.70%
YTM of 3 Year Bond Now	YTM 3	12.10%

Rate Required after	1
for How Many Years	1

1 Year after 1 year from Today Rate = [ [ (1 + YTM 2 ) ^ 2 / ( 1 + YTM 1 ) ^ 1 ] ^ ( 1 / 1 ) ] - 1
= [ [ ( 1 + 0.097 ) ^ 2 / ( 1 + 0.083 ) ^ 1 ] ^ ( 1 / 1 ) ] - 1
= [ [ ( 1.097 ) ^ 2 / ( 1.083 ) ^ 1 ] ^ ( 1 / 1 ) ] - 1
= [ [ 1.2034 / 1.083 ] ^ ( 1 / 1 ) ] - 1
= [ [ 1.1112 ] ^ ( 1 / 1 ) ] - 1
= [ 1.1112 ] - 1
= 0.1112
= I.e 11.12 %

jeff jeffy answered 2 years ago

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