The price of a 1-year zero coupon bond is 0. The price of a 2-year zero coupon bond is 0. The price of a 3-year zero coupon bond is 0. The price of a…
The price of a 1-year zero coupon bond is 0.97. The price of a 2-year zero coupon bond is 0.93. The price of a 3-year zero coupon bond is 0.85. The price of a 4-year zero coupon bond is 0.78. You are a borrower who anticipates needing to borrow $100,000 for one year at the end of year 3 and would like to guarantee the rate on your upcoming loan (i.e., after 3 years you will need a $100,000 loan which will last for one year). Which is closest to the interest rate you will be able to guarantee if there are no transactions costs and you get a fair deal in the interest rate forward market?
a. 1%
b. 2.5%
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d. 5.5%
e. 7%