Consider the following spot rate curve for the next 2 questions: 6-month spot ra
ID: 2813894 • Letter: C
Question
Consider the following spot rate curve for the next 2 questions:
6-month spot rate: 6%.
12-month spot rate: 11%.
18-month spot rate: 13%.
What is the forward rate for a one-year zero coupon bond issued 6 months from today? Equivalently, the question asks for f21, 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 6-month rate first, and then investing the proceeds in a one-year zero coupon bond issued 6 months from today.
Explanation / Answer
(1+f21/2)^2*(1+R6/2)=(1+R18/2)^3
=>f21=2*((1.065^3/1.03)^(1/2)-1)
=>f21=16.5887%