Answer: 4.5%.

## Explanation This question requires estimating the yield for a 6-year bond using linear interpolation between two known yields at different maturities. **Given data:** - Bond 1: 4 years maturity, YTM = 3.3% - Bond 2: 7 years maturity, YTM = 5.1% - Need to estimate: 6-year bond yield **Linear interpolation formula:** \[ \text{Yield}_6 = \text{Yield}_4 + \frac{(6 - 4)}{(7 - 4)} \times (\text{Yield}_7 - \text{Yield}_4) \] **Calculation:** \[ \text{Yield}_6 = 3.3\% + \frac{(6 - 4)}{(7 - 4)} \times (5.1\% - 3.3\%) \] \[ \text{Yield}_6 = 3.3\% + \frac{2}{3} \times 1.8\% \] \[ \text{Yield}_6 = 3.3\% + 1.2\% \] \[ \text{Yield}_6 = 4.5\% \] **Why this is correct:** 1. **Linear interpolation** is the simplest and most common method for estimating yields between known points on the yield curve. 2. The 6-year maturity is 2/3 of the way between 4 years and 7 years. 3. The yield difference between 4-year and 7-year bonds is 1.8% (5.1% - 3.3%). 4. Adding 2/3 of this difference (1.2%) to the 4-year yield gives 4.5%. **Why other options are incorrect:** - **Option A (3.9%)**: This would be too low and doesn't follow the proper interpolation calculation. - **Option B (4.2%)**: This might result from incorrect weighting or calculation errors. **Key concept:** This question tests understanding of yield curve interpolation, which is fundamental in fixed income analysis for estimating yields at maturities where no bonds are directly quoted.

Author: LeetQuiz .