Question

YIELD CURVE FOR ZERO COUPON BONDS RATED AA Maturity YTM Maturity YTM Maturity YTM 1 year 8.00 % 7 year 9.15 % 13 year 10.45 % 2 year 8.11 % 8 year 9.25 % 14 year 10.65 % 3 year 8.20 % 9 year 9.35 % 15 year 10.75 % 4 year 8.50 % 10 year 9.47 % 16 year 10.95 % 5 year 8.75 % 11 year 9.52 % 17 year 11.00 % 6 year 8.85 % 12 year 9.77 % 18 year 11.25 % Assume that there are no liquidity premiums. To the nearest basis point, what is the expected interest rate on a four-year maturity AA zero coupon bond purchased six years from today

Answer 1

Answer:

10.41%

Explanation:

Calculation for the expected interest rate on a four-year maturity

Expected interest rate=[(1+.0947)^10 ÷1+.0885)^6 ]^1=4-1

Expected interest rate=[(1.0947)^10÷(1.0885)^6 ]^1/4-1

Expected interest rate=[(2.47÷1.66)^1/4]-1

Expected interest rate=(1.486^1/4)-1

Expected interest rate=1.1041-1

Expected interest rate=0.1041*100%

Expected interest rate=10.41%

Therefore the expected interest rate on a four-year maturity AA zero coupon bond purchased six years from today will be 10.41%