Question

The current yield on a 1-year treasury bond is 1.02% and the current yield on a 3-year treasury bond is 1.61%. What is the expected semi-annual yield on a 2-year treasury bond, 1 year from today (forward rate)? Use $1,000 as your investment (PV).

Answer 1

To calculate the expected semi-annual yield on a 2-year treasury bond, 1 year from today (forward rate), use the concept of present value.

Step-by-step explanation:

To calculate the expected semi-annual yield on a 2-year treasury bond, 1 year from today (forward rate), we can use the concept of present value. Let's say the face value of the bond is $1,000 and the annual yield on the 2-year bond is 'r'.

1. The present value of the bond after 1 year will be $1,000 / (1 + r/2) = $964.
2. The present value of the bond after 2 years will be $1,000.

Now, we can calculate the expected semi-annual yield using the present value formula: [($1,000 - $964) / $964] * 2 = 1.48%.