Assume that as of today, the annualized interest rate for a seven-year bond is 10 percent, while the annualized interest rate for a three-year bond is 7 percent. Use only this information to estimate the annualized interest rate for a four-year bond expected in three years. Use the geometric average method.
Assume that as of today, the annualized interest rate for a seven-year bond is 10 percent, while the annualized interest rate for a three-year bond is 7 percent. Use only this information to estimate the annualized interest rate for a four-year bond expected in three years. Use the geometric average method.
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
Problem 1PS
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3. Assume that as of today, the annualized interest rate for a seven-year bond is 10
percent, while the annualized interest rate for a three-year bond is 7 percent. Use only
this information to estimate the annualized interest rate for a four-year bond expected
in three years. Use the geometric average method. Make sure to show your work.
Expert Solution
Step 1
We have annualized yield for a 7 year bond and a 3 year bond. We have to find the annualized interest rate for a four-year bond expected in three years. Essentially, we have to find the annual rate for 4 years, three years from now.
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