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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, $r(4.0, 5.0)$? | Financial Risk Manager Part 1 Quiz - LeetQuiz

Explanation:

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.

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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, $r(4.0, 5.0)$ ?

Financial Risk Manager Part 1

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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, r(4.0,5.0)r(4.0, 5.0)r(4.0,5.0)?

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, $r(4.0, 5.0)$ ?