Consider the following spot rate curve for the next 2 questions: 6-month spot ra
ID: 2813557 • Letter: C
Question
Consider the following spot rate curve for the next 2 questions:
6-month spot rate: 5%.
12-month spot rate: 11%.
18-month spot rate: 13%.
What is the forward rate for a 6-month zero coupon bond issued one year from today? Equivalently, the question asks for f12, where 1 time period consists of 6 months. All rates are compounded semi-annually.
Round your answer to 4 decimal places. For example if your answer is 3.205%, then please write down 0.0321.
Hint: Locking in the 18-month rate today should produce the same return as locking in the 12-month rate first, and then investing the proceeds in a 6-month zero coupon bond issued one year from today.
Explanation / Answer
6-month zero coupon bond issued one year from today = (1.131.5/1.11 - 1 ) * 2
6-month zero coupon bond issued one year from today = 0.1643