The following represents two yield curves. $$\begin{array} { | l | c | c | }
\hline \text { Maturity } & \begin{array} { c }
\text { Pure Discount } \
\text { Treasury Yields }
\end{array} & \begin{array} { c }
\text { B-rated Corporate Bond Yields } \
\text { (Pure Discount Bonds) }
\end{array} \
\hline 1 \text { year } & 3 \text { percent } & 6 \text { percent } \
\hline 2 \text { year } & 6 \text { percent } & 10 \text { percent } \
\hline 20 \text { year } & 12 \text { percent } & 17 \text { percent } \
\hline
\end{array}$$
-What interest rate is expected on a one-year B-rated corporate bond in one year? (Hint: Use the implied forward rate.)

Question

The following represents two yield curves. $$\begin{array} { | l | c | c | } 
\hline \text { Maturity } & \begin{array} { c } 
\text { Pure Discount } \
\text { Treasury Yields }
\end{array} & \begin{array} { c } 
\text { B-rated Corporate Bond Yields } \
\text { (Pure Discount Bonds) }
\end{array} \
\hline 1 \text { year } & 3 \text { percent } & 6 \text { percent } \
\hline 2 \text { year } & 6 \text { percent } & 10 \text { percent } \
\hline 20 \text { year } & 12 \text { percent } & 17 \text { percent } \
\hline
\end{array}$$
-What interest rate is expected on a one-year B-rated corporate bond in one year? (Hint: Use the implied forward rate.)

Quizplus · Accepted Answer

The implied forward rate for a one-year B-rated corporate bond in one year can be calculated using the formula: $(1 + y_2)^2 = (1 + y_1)(1 + f)$, where $y_2$ is the two-year yield and $y_1$ is the one-year yield. Solving for $f$ gives: $(1 + 0.10)^2 = (1 + 0.06)(1 + f)$, resulting in $f = 0.1415$ or 14.15 percent.

The Following Represents Two Yield Curves -What Interest Rate Is Expected on a One-Year B-Rated Corporate