Term Structure of Interest Rates Appendix 13 Given: One-Year Zero 8% Two-Year Zero 10% 1yly Forward 12.00% Question 1 Present value a $1,000 cashflow to be received at the end of year 1 0 1 2 3 Cashflow $1,000 PV Question 2 Show the present value of a $1,000 cashflow to be received at the end of year 2 2 3 Cashflow $1,000 PV Question 3 Prove that the lylyr forward rate of interest is in fact 12.00%. First, discount the $1,000 cashflow to be received at the end of year 2 back one year, to the end of year 1 using the lyly forward rate Second, discount that figure back to time zero using the ly spot rate Does the PV equal your answer from question 2? 2 Cashflow $ 1,000 PVI PVO a 0 0 1 3