** Please show work ** Question #40 6.26 percent B. 6.30 percent C. 12.25 percen

Question

** Please show work ** Question #40

6.26 percent B. 6.30 percent C. 12.25 percent D. 12.65 percent E. 12.83 percent 40. What is the one year interest rate one year from now if the current one-year interest rate is 2.55 percent and the two-year interest rate is 3.15 percent? Assume the rates are effective annual rates. A. 3.62 percent B. 3.67 percent C. 3.71 percent D. 3.75 percent E. 3.88 percent 41. What is the annual interest divided by the market price of a bond called? A. coupon rate B. effective annual yield C) current yield D. yield to maturity E. yield to market 42. The yield to maturity is the:

Explanation / Answer

Lets assume you have a amount of Rs 100. The interest rate for 1 year is 2.55% and the interest for 2 years is 3.15%.

If you invest for 1 year, after 1 year, the principal will be 100 * (1 + 2.55%) = 102.55

If you invest for 2 year, after 2 year, the principal will be 100 * (1 + 3.15%)^2 = 106.40

So effective return in the 2nd year is 106.40 - 102.55 = 3.85.

Hence, the interest rate in the 2nd year is 3,85 * 100 / 102.55 = 3.75%

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