The following is a list of prices for zero coupon bonds with different maturities and par value of $1,000. $$\begin{array} { | l | l | }
\hline \text { Maturity (Years) } & { \text { Price } } \
\hline 1 & \$ 925.16 \
\hline 2 & \$ 862.57 \
\hline 3 & \$ 788.66 \
\hline 4 & \$ 711.00 \
\hline
\end{array}$$
-What is,according to the expectations theory,the expected forward rate in the third year?

Question

The following is a list of prices for zero coupon bonds with different maturities and par value of $1,000. $$\begin{array} { | l | l | } 
\hline \text { Maturity (Years) } & { \text { Price } } \
\hline 1 & \$ 925.16 \
\hline 2 & \$ 862.57 \
\hline 3 & \$ 788.66 \
\hline 4 & \$ 711.00 \
\hline
\end{array}$$
-What is,according to the expectations theory,the expected forward rate in the third year?

Quizplus · Accepted Answer

The expected forward rate for the third year can be calculated using the formula: $(1 + f_{3})^3 = \frac{(1 + y_3)^3}{(1 + y_2)^2}$, where $y_n$ is the yield for n years. Calculate $y_2$ and $y_3$ using the bond prices, then solve for $f_3$.

The Following Is a List of Prices for Zero Coupon