If the one-year interest rate over the next 4 years is expected to be 20%, 25%,...

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Answer 1

Answer #1

Interest rate on a 3 year bond :

= [{(1 + 20%) × (1 + 25%) × (1 + 25%)} ^1/3 - 1] + 4%

= [{(1.20) × (1.25) × (1.25)} ^1/3 - 1] + 0.04

= [(1.875^ 0.33) - 1] + 0.04

= (1.230524 - 1) + 0.04

= 0.2705249

= 27.05%

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Answer 2

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