Question

consider the following $1000 par value zeo coupon bonds the expect 1 year interest rate 2 years from no should be

Answer 1

Answer: 9.71%

Step-by-step explanation:

The expected 1 year rate 2 years from now is given by;

`(1 + Rate_(2 years))^(2) * (1 + Rate_(1 year)) = (1 + Rate_(3 years))^(3)`

2 years rate = 8.20%

3 year rate = 8.7%

`(1 + Rate_(2 years))^(2) * (1 + Rate_(1 year)) = (1 + Rate_(3 years))^(3)`

`(1.082)^(2) * (1 + Rate_(1 year)) = (1.087)^(3)\\\\Rate_(1 year) = ((1.087)^(3))/((1.082)^(2)) - 1\\\\= (1.284365503)/(1.604588091037263424) - 1\\\\= 0.0971\\`

= 9.71%