Suppose the 7-year spot interest rate is 9 percent and the 2-year spot interest rate is 6

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Suppose the 7-year spot interest rate is 9 percent and the 2-year spot interest rate is 6 percent. The forecasted 3-year rate 2 years from now is 7.25 percent.

What is the implied forward rate on a 2-year bond originating 5 years from now? (Hint: Under the expectations hypothesis, in equilibrium an investor with a 7-year holding period will be indifferent about investing in a 7-year bond or a combination of securities over the same period.)

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Financial Institutions Markets And Money

ISBN: 9780470561089

11th Edition

Authors: David S. Kidwell, David W. Blackwell, David A. Whidbee, Richard W. Sias

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