Question

Suppose that the annual interest rate this year is 5%, and financial market participants expect the annual interest rate to increase to 5.5% next year, to 6% two years from now, and to 6.5% three years from now. Determine the yield to maturity on each of the following bonds. a) A one-year bond. b) A two-year bond. c) A three-year bond.

Answer 1

a) A one-year bond.

$$5.5-5=0.5$$

b) A two-year bond.

$$6-5=1$$

c) A three-year bond.

$$6.5=5=1.5$$