You are in the process of developing forecasts of short-term interest rates. In order to determine a

Question:

You are in the process of developing forecasts of short-term interest rates. In order to determine a bond trading strategy, you want to determine the market’s short-term (one-year) interest forecasts for different future periods. You have obtained the following data on traded Government of Canada zero coupon bonds of different maturities. Determine the implied one-year forward rates.

Maturity ....Observed YTM%

1 year ......3%

2 years .....5%

3 years ......7%

4 years ......6%

5 years ......5%

1-year forward rate expected in Implied 1-year forward rate %

1 year

2 years

3 years

4 years

5 years

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...