Suppose you observe the following effective annual zerocoupo

Suppose you observe the following effective annual zero-coupon bond yields: 5.43% (1-year), 5.77% (2-year), 6.13% (3-year). Compute the 3-year zero-coupon bond price assuming a $1 par value.

a. 0.48343

b. 0.80693

c.0.81610

d. 0.94224

Suppose you observe the following zero-coupon bond prices per $1 of maturity payment: 0.95193 (1-year), 0.90221 (2-year), 0.84992 (3-year). Compute r₀(2,3), the 1-year implied forward rate for year 3.

a. 6.27%

b. 4.62%

d. 12.00%

e. 5.30%

Solution

the 3-year zero-coupon bond price assuming a $1 par = 1/10613^3 = 0.83654

implied 1 year forward rate for year 3 = 0.90221/0.84992 - 1 = 6.15%