Question 8 4 pts Consider the following spot rate curve for the next 2 questions

Question

Question 8 4 pts Consider the following spot rate curve for the next 2 questions: 6-month spot rate: 5%. . 12-month spot rate: 11% · 18-month spot rate: 14%. What is the forward rate for a 6-month zero coupon bond issued one year from today? Equivalently, the question asks for fi2, where 1 time period consists of 6 months. All rates are compounded semi-annually. Round your answer to 4 decimal places. For example if your answer is 3.205%, then please write down 0.0321. Hint: Locking in the 18-month rate today should produce the same return as locking in the 12-month rate first, and then investing the proceeds in a 6-month zero coupon bond issued one year fromm today.

Explanation / Answer

6 month forward rate 1 year from today = [ ( 1 + 0.14)1.5/ ( 1 + 0.11)1] - 1

6 month forward rate 1 year from today = [1.217187 / 1.11] - 1

6 month forward rate 1 year from today = 1.096565 - 1

6 month forward rate 1 year from today = 9.6565%

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