# Schweser Qbank - Fixed income - Spot vs Forward

Hi, please help me to understand why 1-year spot rate is being used in the answer to this question instead of the current YTM of the 6-year bond of 3.27%?

The question is as follows:
A bond analyst calculates the implied forward yield in one year for today’s 6-year bond to be 3.27%. That same 6-year bond yields 2.95% today, and the 1-year bond yields 1.50% today. The analyst predicts that interest rates will increase and that in one year, 5-year bonds will yield 3.34%. Assume that all the bonds being evaluated are zero-coupon bonds. If the analyst’s yield prediction is correct, the expected return on the 6-year bond over the next year is closest to:

If the yield on the 6-year bond moves to its implied forward yield of 3.27% in one year’s time (when it becomes a 5-year bond), the return will equal the return on the 1-year bond today (i.e., 1.50%). The analyst forecasts that the yield on the 6-year bond in one year’s time (when it becomes a 5-year bond) will be 3.34%. This is seven basis points higher than the implied forward yield of 3.27%. This higher forecast yield means that the bond’s expected return over the next year will be lower than the return on the 1-year bond today.

Assuming a duration of approximately 5 for the bond in one year’s time:

decrease in return = 5 × 7 bp = 35 bp = 0.35%

expected return over one year = 1.50% − 0.35% = 1.15%

(Study Session 8, Module 20.5, LOS 20.d)

It’s not a well written question.

If yields evolve according to the implied forward rates, the 1-period holding return will be today’s 1-period spot rate irrespective of the maturity of the bond purchased. That was covered in Level II.

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Thanks, indeed, without that statement using 1-period spot rate of 1.5% does not make sense.

My pleasure.