The following information is to be used in the following two questions: Using the expectations hypothesis:  You observe the following bonds trading in the market: a 1-year zero priced at $913.24 a two-year 10% coupon bond trading at a par value of $10,00 What is the one-year interest rate (expressed in % without the sign)? Based on the prior information, what is the expected one-year rate for the second year?

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Interest Rate

When you deposit your money with the bank, the deposit earns you some extra money at the end of the specific period – something more than what you deposited. That amount of money that the bank pays you for keeping the money with the bank is the “interest” and the percentage at which the bank pays you for your amount is called the “interest rate”.