Suppose you observe the following zerocoupon bond prices per

Suppose you observe the following zero-coupon bond prices per $1 of maturity payment: 0.96376 (1-year), 0.92491 (2-year), 0.88135 (3-year). Compute r0(2,3), the 1-year implied forward rate for year 3.

Answers: a. 4.01% b. 6.43% c. 4.94% d. 5.13% e. 9.35%

Please explain how to get to the answer, thank you!

Solution

Rate for year 2 to 3=(1+rate for 3 year)^3/(1+rate for 2 year)^2-1=(1/Price of 3 year bond)/(1/Price of 2 year bond)-1=(1/0.88135)÷(1/0.92491)-1=4.94%