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Assume the zero-coupon bonds from 1 year to 4 years are all available, and the current 1-year, 2-year, 3-year and 4-year spot rates are 4%, 5%, 6% and 7% accordingly. Interest rates are annually compounded. You want to lock in a 1-year interest rate beginning in 3 years, by using some of the zero-coupon bonds above.

Question: ) Which zero-coupon bonds would you use?

And what is the locked-in 1-year rate beginning in 3 years?

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  • $\begingroup$ Hi user3238961, welcome to Quant.SE! This seems to be copied homework which we generally do not allow. $\endgroup$
    – Bob Jansen
    May 22, 2015 at 6:52

1 Answer 1

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You're asking for the forward rates between 3y and 4y. I don't want to tell you the answer because it's something that you should attempt. Please read the section on forward rates and how to get the implied interest rate from a zero coupon bond.

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