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Consider the following $1,000 par value zero-coupon bonds: Bond Maturity (years) Yield to Maturity A 1 5% B 2 6% C 3 6
Consider the following $1,000 par value zero-coupon bonds:
Bond Maturity (years) Yield to Maturity
A 1 5%
B 2 6%
C 3 6.5%
D 4 7%
According to the expectations hypothesis, what is the expected 1-year interest rate 3 years from now?
Expert Solution
Computation of the expected 1-year interest rate 3 years from now:-
Forward rate = (1+4 years interest rate)^n/(1+3 years interest rate)^n-1
= (1+7%)^4/(1+6.5%)^3-1
= (1.3108 / 1.2079) -1
= 1.0851 - 1
= 8.51%
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