T-Mobile Wi-Fi 7:09 PM Lecture 3 Assume annual rates. 2-year rates are 4% and 3-year rates are 5%. What is the one-year forward rate 2 years from now? Do you expect actual one-year rates to be higher or lower than this number? 2 Assume annual rates. 5-year rates are 6% and 8-year rates are 7%, what is the 3-year forward rate, 5 years from now? 3. Now, repeat both questions assuming semi-annual rates. 4. Assume annual rates. 4-year rates are 5% and 7-year rates are 6%. Your neighbor offers to lend or borrow. money to/from you for 3-years beginning in 4 years at a rate of 7%. What should you do? s Assume semi-annual rates. 2-year rates are 4% and 10- year rates are 6%. Your other neighbor offers to lend or borrow money to/from you for 8 years beginning in 2 years at a rate of 7%. What should you do? 6. You think rates are going up. Should you buy a floating rate note, a 5-year fixed rate bond or a 10-year fixed rate bond? Does the shape of the yield curve affect your decision? 7. You think rates are going down. Should you buy a floating rate note, a 10-year current coupon bond or a 10-year zero coupon bond? Does the shape of the yield curve affect your decision 8 Real rates are 3% and inflation is 2%. What is the nominal rate of interest? 9, A 3-year TIPs bond has a real yield of 3% and a price of $100. Assume CPI for the next 3 years is 2%, 4% and 3%. Assuming annual coupon flows, what are the cash flows for the next years. What is the irr of this security