What is the yield to maturity of a 2-year bond? $\begin{array}{lr}
&\text { 1-Year } \
&\text { Forward }\
\text { Year } & \text { Rate } \
1 & 4.6 \% \
2 & 4.9 \% \
3 & 5.2 \% \
4 & 5.5 \% \
5 & 6.8 \%
\end{array}$
A) 4.6%
B) 4.9%
C) 5.2%
D) 4.7%
E) 5.8%

Question

Quizplus · Accepted Answer

The yield to maturity of a 2-year bond is calculated by finding the average of the forward rates for the two-year period. We need to find the average of the 1-year forward rate starting in year 1 and the 1-year forward rate starting in year 2. From the table, the 1-year forward rates are:
- 1-year forward rate in year 1: 4.6%
- 1-year forward rate in year 2: 4.9%
The average of these two rates is (4.6%+4.9%)/2 = 4.75%, which is closest to choice D (4.7%). Therefore, D is the best choice.

What Is the Yield to Maturity of a 2-Year Bond