Fixed Income - Pure expectations Theory

CFAI Rdg 55, Pg 242 Exhibit 6 The point the reading tries to illustrate is that local expectations theory suggests that an investor with 6 months horizon will realize a 3% return even though the forward rate is 3.6% and the spot is 3.3%. From hypothetical yield curve, Pd-YTM-Spot for 0.5yr-3%-3%; 1yr-3.3%-3.3%; 1.5yr-3.5%-3.5053%. From the 6-month forward rates table , 1f0-3%; 1f1-3.6% So, Pd-CashFlow-6monthForwardRate%-PresentValue: 1-101.650-3.6%-99.85265 Cash Flow=100+1.65(CPN) Price@Horizon=99.85265 (101.65/1.018) - Understood Total proceeds=99.85265+1.65(CPN) = 101.5027 – I am not sure I understand this. The investor buys for 99.852.(accrued price) .but @maturity, should recv 101.65, making the return computed=1.7974/99.85265=1.8% or ~3.6%BEY) Total Return=3%,1221031,1221167#msg-1221167

This helps! Thanks a lot nomad_SA and night_owl