CFIN
CFIN
5th Edition
ISBN: 9781305661639
Author: Scott Besley, Eugene Brigham
Publisher: Cengage Learning
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Chapter 5, Problem 10PROB
Summary Introduction

Expectation theory:

Expectation theory is used to find forward interest rate based on the prevailing long term interest rates.

Calculate the forward rate as follows:

Forward rate=((Nthyear×Nthyear interest rate)((N-1)thyear×(N-1)thyear interest rate))

Given five year Treasury bond rate is 3.1%, six year Treasury bond rate is 2.9% and seven year Treasury bond rate is 2.6%.

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