The following table shows yields to maturity of zero-coupon Treasury securities.
|
Term to Maturity (Years)
|
Yield to Maturity (%)
|
|
1
|
3.50%
|
|
2
|
4.50
|
|
3
|
5.00
|
|
4
|
5.50
|
|
5
|
6.00
|
|
10
|
6.60
|
a. Calculate the forward 1-year rate of interest for year 3.
b. Describe the conditions under which the calculated forward rate would be an unbiased estimate of the 1-year spot rate of interest for that year.
c. Assume that a few months earlier, the forward 1-year rate of interest for that year had been significantly higher than it is now. What factors could account for the decline in the forward rate?