The investor has three year investment horizon

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Suppose that an investor observes the following prices and yields to maturity on zero coupon government bonds.

Maturity Price Yield to Maturity

1 year 97.50 2.548%

2 years 94.25 2.983

3 years 91.75 2.891

The prices are per 100 of par value; the YTM are stated on a semiannual bond basis.

A) Compute the 1y1y and 2y1y implied forward rates, stated on a semiannual bond basis.

B) The investor has a three year investment horizon and is choosing between buying the two year zero and reinvesting in another one year zero in 2 years or buying and holding to maturity the three year zero. The investor decides to buy the 2 year bond. Based on the is decision what is the minimum YTM the investor expects on one year zeros two years from now?

Reference no: EM131893220

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