Assume the following Treasury spot rates and compute the following forward rates on an annualized bond equivalent yield basis:

a) the 6-month forward rate three years from now

b) the 2-year forward rate one year from now

Period     Years to Maturity           Spot Rate

1                          0.5                          4.5%

2                         1.0                           4.7%

3                           1.5                          4.8%

4                         2.0                            5.1%

5                           2.5                          5 .4%

6                            3.0                          5.6%

7                            3.5                        5.9%

Answer rating: 100% (QA)

To compute the forward rates we can use the formula Forward Rate 1 Spot Rate2Period2 1 Spot Rate1Period11 Period2 Period1 1 where Spot Rate1 ... View the full answer