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Government bonds and YTM

  1. Feb 3, 2012 #1
    hi. i have a problem. it's task 13. please help =)

    12. Based on information about the yields of government bonds you have the
    following term structure:
    Time to maturity 1 year 2 years 3 years 4 years
    Yield 5% 8% 9% 8%
    What is the expected return on the bond if you buy it at time t=0 and sell it at
    time t=4?
    (a) 7.0%
    (b) 8.0%
    (c) 10.0%
    (d) 11.0%
    (e) I choose not to answer.


    13. Based on the information given in question 12, what is the one-year forward rate
    in year 2?
    (a) 7.0%
    (b) 8.0%
    (c) 10.0%
    (d) 11.0%
    (e) I choose not to answer
     
  2. jcsd
  3. Feb 13, 2012 #2
    Re: bonds and YTM

    Show some work or this will be deleted
     
  4. Feb 13, 2012 #3

    HallsofIvy

    User Avatar
    Staff Emeritus
    Science Advisor

    They actually let you choose "I choose not to answer"? I would always choose that and then argue that it is clearly the correct answer!
     
  5. Feb 14, 2012 #4
    Well, assuming these are annual compound rates:

    d. 11%

    [1.09]^3/[1.08]^2-1=0.11028

    But if you want, you can take the long way:

    1. [0.05+x]/2=0.08
    2. [0.05+x+y]/3=0.09

    *where x is the one-yr forward rate after year 1
    and y is your answer
     
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