Question

# Suppose that the prices today of zero-coupon bonds with various maturities are in the following table....

Suppose that the prices today of zero-coupon bonds with various maturities are in the following table. The face value of every bond is \$1,000.

 Maturity in years Price 1 925.93 2 853.39 3 782.92 4 715.00 5 650.00

Calculate the one-year forward rate of interest for every year.

Suppose that today you buy one 3-year maturity zero coupon bond. How many 5-year maturity zeros would you have to sell to make

What are the cash flows from the strategy in part (b) in each year?

What is the effective 2-year interest rate on the effective 3-year ahead forward loan?

a. The interest rate is calculated as (FV/PV)^(1/n) -1 as shown in the table below:

 Maturity in years Price Rate 1 925.93 8.00% 2 853.39 8.25% 3 782.92 8.50% 4 715 8.75% 5 650 9.00%

(b) Suppose that today you buy one 3-year maturity zero coupon bond. How many 5-year maturity zeros would you have to sell to make (Question Incomplte)

(c) What is the effective 2-year interest rate on the effective 3-year ahead forward loan?

5 year loan rate = 9.00% from the table

3 year rate = 8.50%

Let "r" be the 2-year interest rate on the effective 3-year ahead forward loan

(1+0.085)^3 *(1+r)^2 = (1+0.09)^5

(1+r)^2 = 1.09^5/1.085^3 = 1.2046

r = 1.2046^(1/2)-1

r = 0.0975 = 9.75%

Effective 2-year interest rate on the effective 3-year ahead forward loan = 9.75%

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