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find out the one-year forward rates of interest implied by the November 1992 yield curve over the period 1993-2002.

We need a starting point. Use 1993 as 3.8% 4.65 = 2 year rate = (3.8+x)/2.

According to the expectations theory, the 2 year rate = sum of the previous year's rate and the year before that, or the 2 previous 1 year rates.

x = 5.5 %

That is your answer for 1994.

Next, for 1995, you have a 3-year rate = 5.23 = (3.8+5.5+x)/3

x = 6.39 %

Maturity Aug-91 Aug-92 Nov-92

3 m 5.33% 3.13% 3.20%

6 m 5.39% 3.21% 3.43%

1 yr 5.78% 3.47% 3.80%

2 y 6.43% 4.19% 4.65%

3 y 6.80% 4.72% 5.23%

4 y 7.23% 4.86% 5.72%

5 y 7.43% 5.60% 6.12%

6 y 7.51% 5.87% 6.34%

7 y 7.74% 6.12% 6.56%

8 y 7.79% 6.32% 6.87%

9 y 7.86% 6.47% 6.95%

10 y 7.90% 6.59% 7.18%

30 y 8.14% 7.39% 7.53%

Basic Finance, Finance

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