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Suppose That All Investors Expect That Interest Rates for the 4

Question 2

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Suppose that all investors expect that interest rates for the 4 years will be as follows:  Year  Forward Interest Rate 0 (today)  5%17%29%310%\begin{array} { c r } \text { Year } & \text { Forward Interest Rate } \\0& \text { (today) } 5 \% \\1 & 7 \% \\2 & 9 \% \\3 & 10 \%\end{array}
What is the price of 3-year zero coupon bond with a par value of $1,000?


A) $863.83
B) $816.58
C) $772.18
D) $765.55
E) none of these

Correct Answer:

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