You are given the following information regarding the domestic government fixed-interest bond market:
- The current price of a one-year bond paying coupons at a rate of $4.5$% per annum and redeemed at par is £100.41 per £100 nominal
- The current price of a two-year bond paying coupons at a rate of $6.5$% per annum and redeemed at par is £100.48 per £100 nominal
Calculate the two-year spot rate of interest, $y_2$
I'm not sure how to start this question. Do we have to work out the first and second year forward rates?