The following are spot rates for zero coupon bonds, face value $100,000. Maturity 1 year 2 years
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Question:
The following are spot rates for zero coupon bonds, face value $100,000.
Maturity | 1 year | 2 years | 3 years | 4 years | 5 years |
Spot rate (%) | 7.0 | 6.5 | 6.0 | 5.5 | 5.0 |
A bond trader is planning to sell his 5-year zero-coupon bond in 3 years' time, at which time it will have 2 years to maturity, i.e., it will be a 2-year bond. The bond trader believes in the unbiased expectations theory of the term structure of interest rates. What price does the trader expect to receive for his bond?
(i) Calculate the appropriate forward rate.
(ii) Use the forward rate calculated in (i) to calculate the expected bond price
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
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