What is the forward rate of two-year gilt

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Reference no: EM131185228

If the Bank of England is willing to pay 1.3% on a 5-year maturity and 0.88% on a 3-year maturity, you are keen to buy the 3-year rate but are unsure whether to go further to purchase the 5-year due to worries of on-coming recessions and not wanting to have your money tied up for longer. You want to know what the implied 2-year rate on the Gilt is 3years from now so you can appropriately make such an investment decision. What principle/theory allows you to make this analysis? Perform the analysis, what is the forward rate of a 2-year Gilt, 3 years into the future? Suppose the BOE gives you the option to lock-in (today, 3 years early) the rate you just calculated by using a forward rate contract, would you do it? In what situation would your bond portfolio underperform the 5-year maturity of 1.3%, in what situation would it over perform?

Reference no: EM131185228

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