Bonds, Instructor's Manual

For example, a one-year T-bond yields 5% and a two-year T-bond yields 5.5%, then the investors expect to yield 6% for the T-bond in the second year. (1+5.5%)2 = (1+5%)(1+X), solve for X(forward rate) = 6.00238%. Approximation: (5.5%)*2 - 5% = 6% ................
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