Assume zero-coupon bond prices are B(0,0)=$1,B(0,1)= $0.967846,B(0,2)=$0.943010.What is the spot rate of interest?

Question

Quizplus · Accepted Answer

Using the formula for zero-coupon bonds: 
B(0,t) = 1 / (1 + r0,t)^t

We can solve for the spot rate of interest at each time period:

r0,1 = (1 / B(0,1))^(1/1) - 1 = (1 / 0.967846)^1 - 1 = 0.0329

r0,2 = (1 / B(0,2))^(1/2) - 1 = (1 / 0.943010)^(1/2) - 1 = 0.0380

We can then use the formula for the forward rate:

(1 + r0,2)^2 = (1 + r0,1)(1 + f1,2)

Solving for f1,2:

f1,2 = ((1 + r0,2)^2 / (1 + r0,1)) - 1 = ((1 + 0.0380)^2 / (1 + 0.0329)) - 1 = 0.0604

Therefore, the correct answer is B) 0.0332.

Assume Zero-Coupon Bond Prices Are B(0,0)=$1,B(0,1)= $0