Question #46
Reading: Reading 25 The Term Structure and Interest Rate Dynamics
PDF File: Reading 25 The Term Structure and Interest Rate Dynamics.pdf
Page: 18
Status: Correct
Correct Answer: A
Question
The price of a five-year zero coupon bond is $0.7835 for $1 par and the price of a two-year zero-coupon bond is $0.9426 for $1 par. The three-year forward rate two years from now is closest to:
Answer Choices:
A. 4.87%
B. 6.36%
C. 5.54%
Explanation
F(2,3) = P5/P2 = 0.7835/0.9426 = 0.8312
[1+f(2,3)]3 = 1/ F(2,3) = 1/0.8312 = 1.2031
f(2,3) = 6.36%