Given the following zero-coupon bond prices,what are the forward rates f(0,0),f(0,1),f(0,2)?

Question

Quizplus · Accepted Answer

To calculate the forward rates we use the formula:

(1+f(0,m))^m = P(0,T)/P(0,m)

Where f(0,m) is the maturity m forward rate, P(0,T) is the price of a T-maturity zero-coupon bond today, and P(0,m) is the price of an m-maturity zero-coupon bond today.

We are given the following bond prices:

P(0,1) = 0.9615
P(0,2) = 0.8899
P(0,3) = 0.7972

Using the above formula, we can solve for the forward rates:

f(0,0) = N/A (undefined)
f(0,1) = [(0.8899/0.9615)^(1/1)] - 1 = -0.0691
f(0,2) = [(0.7972/0.9615)^(1/2)] - 1 = -0.0217

Therefore, the answer is C, 0.0638, 0.0217, 0.0222.

Given the Following Zero-Coupon Bond Prices,what Are the Forward Rates