Question
You are presented with the following spot rates and successive one-year forward rates; however, some of the rates are missing. Assume that all rates are
You are presented with the following spot rates and successive one-year forward rates; however, some of the rates are missing. Assume that all rates are expressed as EARs (periodicity = 1), so your answers should be expressed similarly.
Tenor Spot Rate Forward Rate*
1 Year 6.50% 6.50%
2 Years 6.00% 5.50%
3 Years 5.50% 4.51%
4 Years 3.00%
5 Years 4.40% 2.54%
6 Years 4.00%
* The forward rates are all for one year, from the end of the previous year to the end of the current year.
a. What is the 4-year spot rate?
b. What is the one-year forward rate for the 6th year (5y1y or IFR5,1)?
c. What is the 3-year forward rate beginning 3 years in the future (3y3y or IFR3,3) ?
d. What is the coupon rate (and YTM) on a 3-year bond that is priced at par value?
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