Yield to Maturity
- Thread starter nicole97
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Please show us what you have tried and exactly where you are stuck.
Please follow the rules of posting in this forum, as enunciated at:
Please share your work/thoughts about this problem.
D
Deleted member 4993
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So then let's start with definitions:
Please define for us term "yield"
Please define for us term "yield to maturity"
Please define for us term "forward rate"
Please define for us term "five year government bond"
Yield to maturity - The interest rate which equates the present value of payments received from a credit a market instrument with its value today
Forward rate - The interest rate predicted by pure expectations theory of the term structure of interest rates to prevail in the future
Government bond - A government bond is a type of debt-based investment, where you loan money to a government in return for an agreed rate of interest. So you would expect full payment in 5 years.
Forward rate - The interest rate predicted by pure expectations theory of the term structure of interest rates to prevail in the future
Government bond - A government bond is a type of debt-based investment, where you loan money to a government in return for an agreed rate of interest. So you would expect full payment in 5 years.
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Just seeing the structure of the calculation entirely explains the process.
Solve for r = "10 year forward rate starting after year 5".
[math](1 + 0.075)^{5} \cdot (1 + r)^{10} = (1 + 0.07)^{15}[/math]
Note: "beginning" in year 5 makes no sense. It starts at the end of year 5.
Solve for r = "10 year forward rate starting after year 5".
[math](1 + 0.075)^{5} \cdot (1 + r)^{10} = (1 + 0.07)^{15}[/math]
Note: "beginning" in year 5 makes no sense. It starts at the end of year 5.