FRM Part I · FRM Exam Part I · Bond Yields and Return Calculations
A one-year Treasury STRIPS is priced at 96.00 and a two-year STRIPS at 91.00, each per 100 face value. Using annual compounding, what is the implied one-year forward rate starting one year from now?
The implied one-year forward rate one year ahead is 5.49%. It equals the ratio of the one-year STRIPS price to the two-year STRIPS price, 96/91, minus one. The two-year spot rate of 4.83% and the one-year spot of 4.17% are not forward rates.
- A5.49%Correct
- B4.83%
- C9.89%
- D4.17%
Explanation
The forward rate satisfies (1+f) = P(1)/P(2) = 96/91 = 1.05495, so f = 5.49%. The 4.83% option is the two-year spot rate, 9.89% is the total two-year return (100/91 - 1), and 4.17% is the one-year spot rate (100/96 - 1).
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