Question

On March 11, 20XX, the existing or current (spot) one-year, two-year, three-year, and four-year zero-coupon Treasury security rates were as follows:
1R1 = 4.75%, 1R2 = 4.95%, 1R3 = 5.25%, 1R4 = 5.65%

Using the unbiased expectations theory, calculate the one-year forward rates on zero-coupon Treasury bonds for years two, three, and four as of March 11, 20XX.

Answer 1

Answer:

Explanation:

one-year forward rate for year 2:

(1+4.75%)(1+f)=(1+4.95%)^2    

(1+4.75%)(1+f)=1.10145025

(1+F)=1.10145025/1.0475

(1+f)=1.0515

f= 5.15%

one-year forward rate for year 3 :

(1+4.95%)^2 (1+f)=(1+5.25%)^3    

(1+4.95%)^2 (1+f)=1.16591345312

(1+f)=1.16591345312 /1.10145025

(1+f)=1.0585

f=5.85%

one-year forward rate for year 4 :

(1+5.25%)^3 (1+f)=(1+5.65%)^4

(1+f)=1.0685

f= 6.85%