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YIELD CURVE FOR ZERO COUPON BONDS RATED AA 1 year - 8% 2 year - 8
YIELD CURVE FOR ZERO COUPON BONDS RATED AA
1 year - 8%
2 year - 8.11%
3 year - 8.2%
4 year - 8.5%
5 year - 8.75%
6 year - 8.85%
7 year - 9.15%
8 year - 9.25%
9 year - 9.35%
10 year - 9.47%
11 year - 9.52%
12 year - 9.77%
13 year - 10.45%
14 year - 10.65%
15 year - 10.75%
16 year - 10.95%
17 year - 11%
18 year - 11.25%
Assume that there are no liquidity premiums.
To the nearest basis point, what is the expected interest rate on a four-year maturity AA zero coupon bond purchased six years from today?
Expert Solution
Computation of the expected interest rate on four year maturity six year from now:-
Expected interest rate = ((1+Rate in year 10)^n/(1+Rate in year 6)^n)^(1/n)-1
= ((1+9.47%)^10/(1+8.85%)^6)^(1/4)-1
= 1.4859^(1/4)-1
= 1.1041 - 1
= 10.41%
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