A 3-yr option free bond with a 9% annual coupon rate has a YTM of 9%. One year and two year spot rates are 6.5% and 7% respectively. The three year spot rate is closest to: a) 6.4% b) 8.1% c) 9.0% d) 9.2% Please show you got the answer. thanks.
D. 9/ 1.065^1 + 9/1.07^2 + 109/ 1 + r^3 = 100 8.45 + 7.86 + 109/ 1 + r^3 = 100 Thus, ur three year spot rate is 9.2%.
9/(1.065)+9/(1.07^2)+109/(1+x)^3=100 x=9.2