Bill is looking at yield maturity rates for zero coupon bonds. They are currently quoted at 14% for one-year maturity, 16.5% for two-year maturity, and 11% for 3-year maturity. Let i be the one-year forward rate for year two implied by current yields of these bonds.

Calculate i.

• .165
• .137
• .166
• .0077
• .191

Hardiek, Aaron (June 2010). "Study Questions for Actuarial Exam 2/FM". digitalcommons.calpoly.edu. Retrieved November 20, 2023.

Solution: E

The expected value for the bond to yield 2 years from now is 16.5%. Thus, the 2 year forward must equal (1.165)². Thus the one year forward rate for year two is j, where:

[[math]] (1.14)(1+j)=(1.165)^2 \implies j= .191 [[/math]]

Hardiek, Aaron (June 2010). "Study Questions for Actuarial Exam 2/FM". digitalcommons.calpoly.edu. Retrieved November 20, 2023.