Today is January 1, 2009, and according to the results of a recent survey, inves

Question

Today is January 1, 2009, and according to the results of a recent survey, investors expect the annual interest rates for the years 2012-2014 to be as follows....

2012-5%, 2013-4%, 2013-3%...... The rates given here include the risk-free rate and appropriate risk premiums. Today a 3 year bond0that is, a bond that matures on December 31, 2011-has an interest rate equal to 6%. What is the yield to maturity for bonds that mature at the end of 2012, 2013, and 2014. Please explain so I can understand.

Explanation / Answer

YTM (2012)= 5+6 =11% YTM (2014) = 4+6 = 10% YTM (2013) =3+6 =9%

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