Question #57
Reading: Reading 25 The Term Structure and Interest Rate Dynamics
PDF File: Reading 25 The Term Structure and Interest Rate Dynamics.pdf
Page: 23
Status: Unattempted
Question
Use the following spot rate curve to answer this question: Maturity 1 2 3 Spot rates 5% 5.5% 6% The price of a 1-year $1 par, zero-coupon bond to be issued in two years is closest to:
Answer Choices:
A. $0.9434
B. $0.9345
C. $0.8396
Explanation
f(2,1) = (1+S3)3/(1+S2)2 – 1 = 7.01%
F(2,1) = 1/[1+ f(2,1)] = 1/(1.0701) = $0.9345