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Unformatted text preview: .44 in a 1year bond (4% yield). At maturity, reinvest the proceeds in
another 1year 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: 2year zerocoupon bond with yield 5% 3year zerocoupon bond with yield 4%
(1.04)3 = (1.05)2 * (1+f3)
f3 = (1.04)3/(1.05)2 1
f3 = 2% 3. Find...
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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.
 Spring '08
 SZEIDL

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