Pure expectation theory determines interest rates in markets

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Reference no: EM131324798

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1. As with most bonds, consider a bond with a face value of $1,000. The bond's maturity is 25 years, the coupon rate is 11% paid annually, and the discount rate is 4%.

What is the bond's Current Yield?

2. Assume that the Pure Expectation Theory determines interest rates in the markets. Today's market rates for different maturities follow an interesting pattern. The spot rate for investing for 1 year is 3%. After that, the rate increases by 1% for each year. So, in general, the rate for year Y is simply 3% + 1%*Y.

Given this information, what is the implied interest rate to invest for 1 year, starting in 3 years?

Reference no: EM131324798

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