What forward rate is embedded in a two year zero coupon bonds with a yield to maturity
Of 6% and a three year zero coupon bond and a yield to maturity of 6.5%? Assume both bonds are currently priced at par.
A) 5.50%
B) 6.00%
C) 6.50%
D) 7.50%

Question

Quizplus · Accepted Answer

The forward rate can be calculated using the formula: (1 + 3-year rate)^3 / (1 + 2-year rate)^2 - 1. Plugging in the given yields: (1.065)^3 / (1.06)^2 - 1 = 7.50%.

What Forward Rate Is Embedded in a Two Year Zero