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1-Year Forward Year Rate 1 4.6% 2 4.9% SIDEN 3 4 5 5.2% 5.5% 6.8% What is the yield to maturity of a 2-year bond?

1-Year Forward Year Rate 1 4.6% 2 4.9% SIDEN 3 4 5 5.2% 5.5% 6.8% What is the yield to maturity of a 2-year bond?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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**1-Year Forward Rates** | Year | Rate | |------|-------| | 1 | 4.6% | | 2 | 4.9% | | 3 | 5.2% | | 4 | 5.5% | | 5 | 6.8% | **Question:** What is the yield to maturity of a 2-year bond? **Explanation:** The table illustrates the forward rates for one-year periods over a five-year span. Each year's rate represents the expected interest rate for a one-year investment starting at that future year. To calculate the yield to maturity (YTM) of a 2-year bond, one would typically use these forward rates to determine the average rate over the 2-year period. This involves considering the compounding effect of the annual rates over the bond's term.
Transcribed Image Text:**1-Year Forward Rates** | Year | Rate | |------|-------| | 1 | 4.6% | | 2 | 4.9% | | 3 | 5.2% | | 4 | 5.5% | | 5 | 6.8% | **Question:** What is the yield to maturity of a 2-year bond? **Explanation:** The table illustrates the forward rates for one-year periods over a five-year span. Each year's rate represents the expected interest rate for a one-year investment starting at that future year. To calculate the yield to maturity (YTM) of a 2-year bond, one would typically use these forward rates to determine the average rate over the 2-year period. This involves considering the compounding effect of the annual rates over the bond's term.
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