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Explanation for the shape of the yield curve

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Question: (Forward Rates) Assume there is no preferred habitat so that the expectations hypothesis is the only explanation for the shape of the yield curve. Suppose the yield on zero-coupon bonds maturing at the end of five years is 6.5% and the yield of zero-coupon bonds maturing at the end of four years is 6.25%. What is the bond market's implied expected short-term (one-year) interest rate, termed a ‘‘forward rate,'' four years in the future (that is, the one year rate that is expected to prevail from the end of Year 4 to the end of Year 5)?

Reference no: EM131735534

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