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At your favorite bond store, Bonds-R-Us, you see the following prices: One-year $100 zero selling for $90.19 ; Three-year 10% coupon $1,000 par bond selling
At your favorite bond store, Bonds-R-Us, you see the following prices: One-year $100 zero selling for $90.19 ; Three-year 10% coupon $1,000 par bond selling for $1,000; and Two-year 10% coupon $1,000 par bond selling for $1,000. Assume that the expectations theory for the term structure of interest rates holds, no liquidity premium exists, and the bonds are equally risky. What is the implied one-year rate two years from now? Please show calculations for best understanding.
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