Bonds - Yields and Interest Rates_Week 7

072 87344 invest 87344 in a 1 year bond 4 yield at

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: .44 in a 1-year bond (4% yield). At maturity, reinvest the proceeds in another 1-year bond. Both bonds must provide equal returns, so we solve for the forward rate after 1 year. Invest at 4% for 1 year: Forward rate after 1 year: $873.44*1.04 = $908.38 $908.38 * (1+x%) = $1000 x = 10% Check: (1.07)2=(1.04)*(1.10) 2. Find the forward rate needed to make the LOOP hold: 2-year zero-coupon bond with yield 5% 3-year zero-coupon bond with yield 4% (1.04)3 = (1.05)2 * (1+f3) f3 = (1.04)3/(1.05)2 -1 f3 = 2% 3. Find...
View Full Document

This note was uploaded on 05/03/2013 for the course ECON 136 taught by Professor Szeidl during the Spring '08 term at University of California, Berkeley.

Ask a homework question - tutors are online