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Assume that a few months earlier the forward 1-year rate of

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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?

Reference no: EM13574780

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