Given a 2-year spot rate of 4% and assuming the market expects a 3-year security two years from now to yield 5%, calculate the current 5-year spot rate. - Given the above information why do we assume the produced answer would already be assuming annual compounding? the correct answer is 4.6& Thanks
I also don’t quite understand this topic but I just tries (1+s) raised to the power 5 = 1.04^2 * 1.05^3 and I got 4.6%
sorry if I was confusing. I got 4.6 % as well doing the standard spot rate calculation method, but i took 4.6% *2 = 9.2% because I thought that was the annualized spot rate. The correct answer did not require times 2. I am kind of confused with the concept of annualizing in regards to spot rates.