The following represents two yield curves.
$\begin{array} { | l r r | }
\hline \text { Maturity } & \text { Pure Discount Treasury Yields } & \text { B-rated Carparate Band } \
\hline & & \text { Yields (Pure Discaun Bonds) } \

1 \text { year } & 3 \text { percent } & 6\text { percent }\
2 \text { year } & 6 \text { percent }& 10 \text { percent } \
20 \text { year } & 12 \text { percent }& 17 \text { percent } \
\hline
\end{array}$
-What interest rate is expected on a one-year B-rated corporate bond in one year? (Hint: Use the implied forward rate. )

Question

The following represents two yield curves.
 $\begin{array} { | l r r | } 
\hline \text { Maturity } & \text { Pure  Discount Treasury Yields } & \text { B-rated Carparate Band } \
\hline  & & \text { Yields (Pure Discaun Bonds) } \

1 \text { year  } & 3 \text { percent } & 6\text { percent }\
2 \text { year  } & 6 \text { percent }& 10 \text { percent } \
20 \text { year } & 12 \text { percent }& 17 \text { percent } \
\hline
\end{array}$
-What interest rate is expected on a one-year B-rated corporate bond in one year? (Hint: Use the implied forward rate. )

Quizplus · Accepted Answer

p(1 + k) = (1 + i) p = (1 + i) ÷ (1 + k)
where p = probability of full repayment
k = interest rate on corporate debt
i = interest rate on Treasury
p1 = (1.03) ÷ (1.06) = 0.9717 probability of default = (1 - p1) = 1 - 0.9717 = 0.0283. The implied forward rate for a one-year B-rated corporate bond in one year can be calculated using the formula: $(1 + y_2)^2 = (1 + y_1) \times (1 + f)$, where $y_2$ is the two-year yield and $y_1$ is the one-year yield. Solving for $f$, we get approximately 14.15 percent.

The Following Represents Two Yield Curves -What Interest Rate Is Expected on a One-Year B-Rated Corporate