1. Consider the following yield curve.
Maturity . Yield
1 year 7%
2 years 12%
3 years 10%
What are the forward rates for Years 2 and 3?
The forward rate for year 2 is (1+f2)=
The forward rate for year 3 is (1+f3)=
2. Suppose that you bought a bond at 950.26. This investment returns 72.73 in Year 1, 66.12 in Year 2, and the rest of the value in Year 3. What is the duration?
3. A bond has a YTM of 8.5% and duration of 5.25 years. If the market yield changes by 31 basis points, what percentage change will there be in the bond’s price?