A one year zero coupon treasury bond yields 3.26% and a two year zero coupon treasury...

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A one year zero coupon treasury bond yields 3.26% and a two year zero coupon treasury...

A one year zero coupon treasury bond yields 3.26% and a two year zero coupon treasury yields 5.61%. What is the expected 1 year interest rate 1 year from now, assuming no-arbitrage pricing and no liquidity premium?

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Answer 1

Answer #1

1 year rate, 1 year from now = [1 + 2-year rate]² / [1 + 1-year rate]

= [(1 + 0.0561)² / (1 + 0.0326)] - 1

= 1.0801 - 1 = 0.0801, or 8.01%

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Answer 2

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