You are given the following term structure (yield curve) of interest rates: Year
ID: 2712710 • Letter: Y
Question
You are given the following term structure (yield curve) of interest rates: Years Annual Spot Rate 1 5.0% 2 5.7% 3 6.1% 4 6.3% You know that, two years from now (at time t = 2), you will want to purchase a two-year 10% annual coupon bond with a face value of $1,000. Find the expected price of that bond at time t = 2. (Hint: Find the implied one-year forward rate two years from now, and find the implied two-year forward rate two years from now.) I found both of the forward rates but I don't know how to integrate them.
Explanation / Answer
Answer: Calculation of the expected price of that bond at time t=2
Forward rate=(1+0.057)2/(1+0.05) -1 =6.40%
=10*PVIF(5%,1)+(1010*PVIFA(6.4%,2)
=$9.52+$892.150
=$901.67
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