What Is the One-Year Forward Rate in Year 2 for Government Bonds?

[monsmatglad]

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

 

[Greg Bernhardt]

Show some work or this will be deleted

 

[HallsofIvy]

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!

 

[survival]

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