1. Forward Rates Problems
Assuming in December of 2014, the term structure of Treasury securities included the following rates:
|
Security
|
Annualized Yield (%)
|
|
3-month bill
|
4.50
|
|
6-month bill
|
4.57
|
|
1-year note
|
4.52
|
|
2-year note
|
4.51
|
|
3-year note
|
4.48
|
a) The six-month annualized yield expected in the second half of year 2015 (forward rate for 6-month bill in June 2015)
b) The one-year expected yield for year 2017 (forward rate for 1-year note in December 2016)
c) Suppose the 8-year spot interest rate is 8 percent and the 3-year spot rate is 4 percent. What is the implied forward rate on a 5-year bond originating 3 years from now?
d) Suppose the 5-year spot interest rate is 6 percent. Under the expectation hypothesis the forward rate on a 3-year bond originating 2 years from now was estimated. The estimated forward rate is 5.5 percent. What is the 2 -year bond spot rate?