Hi,
I came across this question and I do not understand the solution. Would someone please be able to provide an explanation?
Assume the following six-month forward rates (presented on an annualized, bond-equivalent basis) were calculated from the yield curve.
Notation Forward Rate 1f0 0.50% 1f1 0.70% 1f2 1.00% 1f3 1.50% 1f4 2.20% 1f5 3.00% 1f6 4.00%
The 3-year spot rate is closest to:
A. 0.74%. B. 1.48%. C. 2.06%.
ANSWER:
z6 = [1.0025 × 1.0035 ×1.0050 × 1.0075 × 1.0110 × 1.0150]1/6 – 1 = 0.0074 × 2 = 1.48%.
Why are they using Z6 ?
thanks!