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Suppose that the current one-year zero-coupon rate is 3.5% and that the expected one-year rate next...

Suppose that the current one-year zero-coupon rate is 3.5% and that the expected one-year rate next year is 5%. If the current 2-year spot rate is 4.5%, what is the implied term premium for the two-year zero-coupon bond? Use the approximation from class.

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Answer #1

Premium amount = ( 1 + current 2 year spot rate )2 - ( 1 + current rate for one year ) * ( 1 + expected one year rate next year )

                         = ( 1.045 )2 - ( 1.035 ) * ( 1.05 )

                         = 1.092025 - 1.08675

                        = 0.005275 or 0.5275% Answer

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