The Wall Street Journal reports that the current rate on five-year Treasury bonds is 2.85 percent and on 10-year Treasury bonds is 4.35 percent. Assume that the maturity risk premium is zero. Calculate the expected rate on a five-year Treasury bond purchased five years from today, E(₅r₅).

Question

Quizplus · Accepted Answer

The expected rate on a five-year Treasury bond purchased five years from today can be calculated using the formula for the implied forward rate: (1 + 10-year rate)^10 / (1 + 5-year rate)^5 - 1. Plugging in the given rates: (1 + 0.0435)^10 / (1 + 0.0285)^5 - 1 = 5.87%.

The Wall Street Journal Reports That the Current Rate on Five-Year