The yield to maturity on one-year zero-coupon bonds is 7.1%. The yield to maturi

Question

The yield to maturity on one-year zero-coupon bonds is 7.1%. The yield to maturity on two-year zero-coupon bonds is 8.1%.

a. What is the forward rate of interest for the second year? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Forward rate of interest             %

b. If you believe in the expectations hypothesis, what is your best guess as to the expected value of the short-term interest rate next year? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Short-term interest rate             %

Explanation / Answer

a)the forward rate of interest is given by formuale
(1+8.9%)+(1+x)=(1+9.9%)^2
x=9.11%

b)This is giveb by forward rate of interest in second year and it is 9.11%

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