The "break-even" interest rate for year n that equates the return on an n-period zero-coupon bond to that of an n-1 - period zero-coupon bond rolled over into a one-year bond in year n is defined as
A)the forward rate.
B)the short rate.
C)the yield to maturity.
D)the discount rate.

Question

Quizplus · Accepted Answer

The break-even interest rate is essentially the expected interest rate for the next period. It is calculated using the forward rate, which is the expected rate of return on a future investment. Therefore, the best choice is (A) the forward rate.

The "Break-Even" Interest Rate for Year N That Equates the Return