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**CFA Practice Question**

The yield of a 7 year maturity Zero is 5.47%. The yield of a 9 year maturity Zero is 5.52%. The Forward Rate from the 7th to the 8th year is 5.49%. Assume annual compounding. What is the Forward Rate from the 8th to the 9th year:

A. 5.5%

B. 5.7%

C. 5.9%

**Explanation:**The price of a 7 year maturity Zero is $1/1.0547^7 = $0.688807, and of a 9 year maturity Zero is $1/1.0552^9 = $0.616576. Hence the return that can be obtained from the 7th to the 9th year by trading Zeros is $0.688807/$0.616576 - 1 = 11.7147%. And the return from the 8th to the 9th years that can be guaranteed TODAY by trading Zeros and entering into a Forward Contract from the 7th to the 8th years is: 1.117147/1.0549 - 1 = 5.9008%.

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**User Contributed Comments**
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Hamad333_1 |
what reading? |