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3. Calculate the one-year forward rates of interes...

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3. Calculate the one-year forward rates of interest implied by the November 1992 yield curve over the period 1993-2002. We need a starting point. Use 1993 as 3.8% 4.65 = 2 year rate = (3.8+x)/2. According to the expectations theory, the 2 year rate = sum of the previous year's rate and the year before that, or the 2 previous 1 year rates. x = 5.5 % That is your answer for 1994. Next, for 1995, you have a 3-year rate = 5.23 = (3.8+5.5+x)/3 x = 6.39 % Maturity Aug-91 Aug-92 Nov-92 3 m 5.33% 3.13% 3.20% 6 m 5.39% 3.21% 3.43% 1 yr 5.78% 3.47% 3.80% 2 y 6.43% 4.19% 4.65% 3 y 6.80% 4.72% 5.23% 4 y 7.23% 4.86% 5.72% 5 y 7.43% 5.60% 6.12% 6 y 7.51% 5.87% 6.34% 7 y 7.74% 6.12% 6.56% 8 y 7.79% 6.32% 6.87% 9 y 7.86% 6.47% 6.95% 10 y 7.90% 6.59% 7.18% 30 y 8.14% 7.39% 7.53%

 

Paper#13637 | Written in 18-Jul-2015

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