Compute the one-year holding period yield of a 6-year, zero-coupon bond, priced at $76 today, given the following spot rate expectations one year from today. Spot Rate Forecast 4-year 4% 5-year 4.5% 6-year 4.75% A) 4.33% B) 5.59% C) 4.05% D) 5.33%

D. Price of the stock 1 year from now = 100 / (1.0225 ^ 5) = 80.05 Hold period yield = 80.05 - 76 / 76 = 5.33%

B. price of the Bond 1 year from now = 100 / ( 1.045 ^ 5 ) = 80.245 Holding Period yield = 80.245 - 76 / 76 = 5.59 %

sv102307, your answer is correct but you had a funny typo. it’s 1.0225^10, not 5.

When do we use forward rates and what are the cases in which we use the spot rates to discount

this question is sneaky, it gives you both the answer for annual compounding and semi annual…

in the case of a bond, unless they specifically say annual interest, I believe we have to use the semi-annual convention.

B.? FV=100 i=4.5% n=5 PMT = 0 PV = 80.24 (80.24/76)-1 = 5.59%

oops semi-annual…