Question

Yield rate to maturity for zero coupon bonds are currently quoted at 8.5% for one-year maturity, 9.5% for two-year maturity, and 10.5% for three-year maturity. Let i be the one-year forward rate, deferred one year, implied by current yields of these bonds.Calculate i.

Answer 1

Answer: 10.5%

Explanation:

As i is the one-year forward rate, it can be calculated thus:

= (1 + Two-year maturity rate)² / ( 1 + one-year maturity rate) - 1

= (1 + 9.5)²/ (1 + 8.5%) - 1

= 10.5%