4. Pure expectations theory: Three-year bonds Juanita would like to invest a certain amount of money for three years and considers investing in a one-year bond that pays 4 percent. Juanit then like to buy a second one-year bond that is expected to pay the one-year forward rate one year from now, and finally a third one-year is expected to pay the one-year forward rate two years from now. (Hint: Assume that 2-year bonds and 3-year bonds both yield 9.000%.) If the annualized interest rate on a three-year bond is 9 percent, the forward rate of a one-year security beginning two years from now is percent.

4. Pure expectations theory: Three-year bonds Juanita would like to invest a certain amount of money for three years and considers investing in a one-year bond that pays 4 percent. Juanit then like to buy a second one-year bond that is expected to pay the one-year forward rate one year from now, and finally a third one-year is expected to pay the one-year forward rate two years from now. (Hint: Assume that 2-year bonds and 3-year bonds both yield 9.000%.) If the annualized interest rate on a three-year bond is 9 percent, the forward rate of a one-year security beginning two years from now is percent.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter5: The Time Value Of Money

Section: Chapter Questions

Problem 11P

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