Suppose the yield for a security with a maturity of 2 periods is denoted by y₂ and the one-year forward rate for period 2 is denoted by f₂. Generalise the formula (1 + y₂)² = (1 + y₁)(1 + f₂) to the n-period case detailing all your steps and carefully explaining your reasoning. 

Explain what will happen if the formula you derived does not hold for some securities in the market.

Answer rating: 100% (QA)

Solution The formula 1 y22 1 y11 f2 to the nperiod case 1 ynn 1 yn11 fn Where yn the yield for a sec... View the full answer