Asked by Sierra Summers on Apr 24, 2024
Verified
One-, two-, and three-year maturity, default-free, zero-coupon bonds have yields to maturity of 7%, 8%, and 9%, respectively. What is the implied 1-year forward rate 1 year from today?
A) 2.07%
B) 8.03%
C) 9.01%
D) 11.12%
Forward Rate
An agreed-upon price for a financial transaction that will occur at a future date.
Zero-Coupon Bonds
Debt securities that are sold at a deep discount and do not pay periodic interest payments, but instead are redeemed at their face value at maturity.
Yields to Maturity
The total return anticipated on a bond if it is held until it matures, considering all interest payments and the principal repayment.
- Gain an understanding of the relationship between market interest rate movements and their effects on bond prices and yields.
Verified Answer
ZK
Zybrea KnightMay 02, 2024
Final Answer :
C
Explanation :
1.07(1 + f2) = 1.082 = 1.1664
(1 + f2) = 1.1664/1.07 = 1.0900935
f2 = 9.01%
(1 + f2) = 1.1664/1.07 = 1.0900935
f2 = 9.01%
Learning Objectives
- Gain an understanding of the relationship between market interest rate movements and their effects on bond prices and yields.