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    Implied 1-year forward rate

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    The YTM on a 1 year pure discount bond is 4%, while the YTM on a 2 year pure discount bond is 5%. Both bonds have a face value of $1,000. What is the implied 1-year forward rate? If you believe that the 1-year spot rate one year from today is going to be 7%, outline a strategy that allows you to take advantage of your belief.

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    The YTM on a 1 year pure discount bond is 4%, while the YTM on a 2 year pure discount bond is 5%. Both bonds have a face value of $1,000. What is the implied 1-year forward rate? If you believe that the 1-year spot rate one year from today is going to be 7%, outline a strategy that allows you to take advantage of your belief.

    YTM ...

    Solution Summary

    The solution calculates the implied 1-year forward rate and outlines steps to make arbitrage profit.

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