Question

spot rate on 1yr bond- 6%

spot rate on 2yr bond- 8%

liq premium for yr 2- 0 .5%

what is the expected one year rate, one year from today

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

I HOPE, LIQUIDITY PREMIUM =0.5%

EXPECTED ONE YEAR RATE, ONE YEAR FROM TODAY = E(2R1) = 9.54% (ROUNDED TO 2 DECIMALS)

Alle 9 w ? v . 1 ENG 04:50 12-02-2020 14 EH664 EF I EG EH EI EI EK EL EM EN EO EP 647 651 1R1 = 6.00% 1R2 = 8.00% 648 L2= 0.50% 649 650 1R2= [(1+1R1)(1+E(2R1)+L2)]^1/2-1 0.08 = [(1+0.06) (1 + E(2R1)+ 0.005)]^(1/2) - 1 652 1.08 = ((1+0.06)E(2R1)+ 1.005)]^(1/2) 653 SQUARING BOTH THE SIDES 654 1.1664 = (1+0.06) (E(2R1)+ 1.005) 655 1.100377= (E(2R1)+ 1.005) 656 0.095377= E(2R1) 657 658 E(21) = 0.095377 659 ANSWER E(2R1) = 9.54% 660 661 662 663 664 YIELD SPOT Sheet2 AFN BANKING NOTE 51 53 CLEAN PRICE $10 BIDDING, UNDERWRITING EUAC AW LIFE LP, IP, MRP, INFLATION WARR... : (