Question: At your favorite bond store, you see the following prices:
• 1-year $100 zero selling for $90.19
• 3-year 10% coupon $1000 par bond selling for $1000
• 2-year 10% coupon $1000 par bond selling for $1000
Assume that the pure expectations theory for the term structure of interest rates holds, no liquidity premium exists, and the bonds are equally risky. What is the 1-year forward rate two years from now?