Consider a market with two risk-free zero-coupon bonds, A and B. Their respective maturities are 1...
Consider a market with two risk-free zero-coupon bonds, A and B.
Their respective maturities are 1 and 2 years, and their market
prices are 97.0874 and 95.1814 (expressed as percentage of the face
value).
(A) Calculate the implied forward rate between
years one and two, f1;2 .
(B) According to the Pure-Expectations Theory,
what are the investors views about the one-year rate r1 one year
from now?
Homework Answers
| A) | Implied forward rate = 97.0874/95.1814-1 = | 2.00% |
| B) | Current 1 Year rate = 100/97.08-1 = | 3.01% |
| Current 2 Year rate = (100/95.1814)^(1/2)-1 = | 2.50% | |
| 1 Year rate 1 Year from now = 1.025^2/1.0301-1 = | 1.99% |
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