here are some points from a yield curve: yrs to maturity yield rate 1 0.0500 2 0

Question

here are some points from a yield curve:

yrs to maturity yield rate
          1 0.0500
          2 0.0600
          3 0.0650
          4 0.0700
          5 0.0725


#1 Determine the present value, to nearest penny, of:
a. $1,000 payable at time 2
b. $1,000 payable at time 4


#2 Determine the following forward rates to 6 decimal places eg .062211:

a. the forward rate that applies from year 1 to year 2
b. the forward rate that applies from year 2 to year 3
c. the forward rate that applies from year 4 to year 5

Explanation / Answer

a. PV = 1000/(1.06)^2 = 890.00

b. PV = 1000/(1.07)^4 = 762.90

c. forward rate = 1.06^2/1.05 - 1 = 7.01%

d. forward rate = 1.065^3/1.06^2 - 1 = 7.51%

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