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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