consider the following spot rate information Maturity (yrs) 1.0 2.0 3.0 4.0 5.0 Forward rate Spot rate

consider the following spot rate information

 

Transcribed Image Text:

Maturity (yrs) 1.0 2.0 3.0 4.0 5.0 Forward rate Spot rate (Z) (%) 4.0% (a) What is the future value in 3 years of $100 invested today? (b) What is the future value in 4 years of $100 invested today? (c) What is the ratio of the future value calculated in (b) divided by the future value calculated in (a)? (d) What is the 1 year forward rate between years 3 and 4 (f3 to 4)? You forecast that the prevailing 1 year interest rate in 3 years time will be 8%. (e) Would you be better off investing $100 in (i) a four year zero coupon bond or (ii) in a three year zero coupon bond and then reinvesting the proceeds for 1 year at your forecasted rate of 8%? (f) What is the future value of $100 in each case? (g) Calculate the following forward rates. f1 to 2 f2 to 3 f3 to 4 f4 to 5 5.0% 6.0% 7.0% 8.0% Forward rate (fi) (%) Maturity (yrs) 1.0 2.0 3.0 4.0 5.0 Forward rate Spot rate (Z) (%) 4.0% (a) What is the future value in 3 years of $100 invested today? (b) What is the future value in 4 years of $100 invested today? (c) What is the ratio of the future value calculated in (b) divided by the future value calculated in (a)? (d) What is the 1 year forward rate between years 3 and 4 (f3 to 4)? You forecast that the prevailing 1 year interest rate in 3 years time will be 8%. (e) Would you be better off investing $100 in (i) a four year zero coupon bond or (ii) in a three year zero coupon bond and then reinvesting the proceeds for 1 year at your forecasted rate of 8%? (f) What is the future value of $100 in each case? (g) Calculate the following forward rates. f1 to 2 f2 to 3 f3 to 4 f4 to 5 5.0% 6.0% 7.0% 8.0% Forward rate (fi) (%)

Answer rating: 100% (QA)

aThe future value of 100 invested today for 3 years is 12600 FV PV 1 zn FV 100 1 0063 FV 12600 b The ... View the full answer