3. The following table shows yields to maturity of zero-coupon Treasury securities. Term to Maturity (Years) Yield
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3. The following table shows yields to maturity of zero-coupon Treasury securities.
Term to Maturity (Years) Yield to Maturity (%)
1 3.50%
2 4.50 3 5.00 4 5.50 5 6.00 10 6.60
a. Calculate the forward 1-year rate of interest for year 3.
b. Describe the conditions under which the calculated forward rate would be an unbiased estimate of the 1-year spot rate of interest for that year.
c. Assume that a few months earlier, the forward 1-year rate of interest for that year had been significantly higher than it is now. What factors could account for the decline in the forward rate?
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