Question

From the Treasury strip yield curve, the current required yields on one-, two-year Treasury strips are 4.5% and 5.0%, respectively. The current yield curve indicates that appropriate one-year discount bonds are yielding 6.5%, two-year bonds are yielding 7.5%. a. Calculate the one-year forward rate on the Treasuries and the corporate bond.

Answer 1

The one-year forward rate on Treasuries is 10.11%. The forward rate on a corporate bond cannot be determined without additional information.

Step-by-step explanation:

The one-year forward rate on Treasuries can be calculated using the formula:

Forward Rate = [(1 + Yield of 2-year bond) / (1 + Yield of 1-year bond)] - 1

Using the given information:

1. Yield of 1-year Treasury strip = 4.5%
2. Yield of 2-year Treasury strip = 5.0%

Plugging in the values:

Forward Rate = [(1 + 0.05) / (1 + 0.045)] - 1 = 10.11%

The one-year forward rate is therefore 10.11%.

The forward rate on a corporate bond cannot be determined based on the information given.

We would need the yields of one-year and two-year corporate bonds to calculate the forward rate.