Simone would like to invest a certain amount of money for three years and considers investing...

Transcribed Image Text:

Simone would like to invest a certain amount of money for three years and considers investing in a one-year bond that pays 5 percent. Simone would then like to buy a second one-year bond that is expected to pay the one-year forward rate one year from now, and finally a third one-year bond that is expected to pay the one-year forward rate two years from now. (Hint: Assume that 2-year bonds and 3-year bonds both yield 9.000%.) If the annualized interest rate on a three-year bond is 9 percent, the forward rate of a one-year security beginning two years from now is percent. Simone would like to invest a certain amount of money for three years and considers investing in a one-year bond that pays 5 percent. Simone would then like to buy a second one-year bond that is expected to pay the one-year forward rate one year from now, and finally a third one-year bond that is expected to pay the one-year forward rate two years from now. (Hint: Assume that 2-year bonds and 3-year bonds both yield 9.000%.) If the annualized interest rate on a three-year bond is 9 percent, the forward rate of a one-year security beginning two years from now is percent.

Answer rating: 100% (QA)

Assuming 2year and 3year bonds both yield 9000 the oneyear forward rate of a oneyear se... View the full answer