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Current 1-yr interest rate is 13%. Forward rate during 2 nd year is 12% and is expected to dropby 0.5% each of the next 3

Current 1-yr interest rate is 13%. Forward rate during 2 nd year is 12% and is expected to dropby 0.5% each of the next 3 years. Calculate YTM for 2-yr, 3-yr, and 4-yr bond. Draw the yieldcurve and explain its shape using appropriate theory of term structure.

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To calculate the YTM for a 2year bond we can use the formula YTM 1 r1 x 1 r2 1 Where r1 is the 1year ... blur-text-image

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