YIELD CURVE FOR ZERO COUPON BONDS RATED AA Assume that there are no liquidity premiums. To the nearest basis point,what is the expected interest rate on a four-year maturity AA zero coupon bond purchased six years from today?

Question

YIELD CURVE FOR ZERO COUPON BONDS RATED AA  Assume that there are no liquidity premiums. To the nearest basis point,what is the expected interest rate on a four-year maturity AA zero coupon bond purchased six years from today?

Quizplus · Accepted Answer

To determine the expected interest rate on a four-year maturity AA zero coupon bond purchased six years from today, we first need to identify the four-year maturity point on the yield curve. From the graph, we can see that the four-year maturity point falls between 8.5% and 12%, closer to 12%. We also know that there are no liquidity premiums, so the expected interest rate is equal to the four-year spot rate. Therefore, the expected interest rate on a four-year maturity AA zero coupon bond purchased six years from today would be approximately 10.41%, which is the closest option to our estimate.