Answer-first summary for fast verification
Answer: 7.06%
For a one-year forward rate under continuous compounding: $$ P(0,5)=P(0,4)e^{-f(4,5)(5-4)} $$ Thus: $$ f(4,5)=\ln\left(\frac{P(0,4)}{P(0,5)}\right) $$ Substitute the bond prices: $$ f(4,5)=\ln\left(\frac{88}{82}\right) $$ $$ \frac{88}{82}=1.07317\Rightarrow \ln(1.07317)\approx 0.0706 $$ So the implied forward rate is **7.06%**. Therefore, the correct answer is **D**.
Author: Manit Arora
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Question-159.2. The price of a $100 par zero-coupon bond with four (4) years to maturity is $88.00. The price of a $100 par zero-coupon bond with five (5) years to maturity is $82.00. Under continuous compounding, what is the implied forward rate, ?
A
4.06%
B
5.06%
C
6.06%
D
7.06%
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