Question
Suppose that an investor observes the following prices and yields to maturity on zero-coupon government bonds: Maturity Price Yield-to-Maturity 1 year 97.50 2.548% 2 years
Suppose that an investor observes the following prices and yields to maturity on zero-coupon government bonds: |
|
|
Maturity | Price | Yield-to-Maturity |
1 year | 97.50 | 2.548% |
2 years | 94.25 | 2.983 |
3 years | 91.75 | 2.891 |
1. Compute the 1y1y and 2y1y implied forward rates, stated on a semiannual bond basis.
2. The investor has a three-year investment horizon and is choosing between buying the two-year zero and reinvesting in another one-year zero in two years or buying and holding to maturity the three-year zero. The investor decides to buy the two-year bond. Based on this decision, what is the minimum YTM the investor expects on one-year zeros two years from now?
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