Hey guys, I can’t seem to get this question: A three year option free bond with an 8% annual coupon rate has a yield to maturity of 9%. Assume that the one and two year spot rates are 6.5% and 7.0%, respectively. The 3 year spot rate is closest to: A) 6.4% B) 8.1% C) 9.0% D) 9.2%
i keep on getting 13.64 for some reason. if yield to maturity is 9% and the first year is 6.5 and second 7 the3rd year has to be higher than 9 but i think a lot higher than 9.2
i like florinpop’s logic. the correct answer is D.
maratikus can you post some calculations so i can get it?
Wouldnt it be B… 3 year opt free bond…8% annual coupon… 3rd year spot…8%?
1.065*1.07*x=1.09^3 that’s how I think it shoud be solved
I got 9.2%. Suppose FV is 100. PV = 97.47. PV = 8 /1.065 + 8 / (1.07^2) + 108 / (x ^ 3); X = 1.092.
ok disptra makes sense I screwed up because I used the formula for spot/forward rates
The correct answer is D
yep… def. not B haha…