Hi,
I have a question that I am stuck on.
Calculate the 6 year spot rate from the following.
Bond 1 - 6 percent six-year bond yields 12 percent and Bond 2- 10 percent six-year bond yields 8 percent.
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I'm not sure how to do this...
I have done the first step which is to value the bonds so:
Bond 1 PV = $753
Bond 2 PV = $1092
Now I don't know what to...I saw one text book said to derive the rate you need to (1000/PV)^1/6, but this surely is not right as it gives 2 different answers for each of the two bonds.
What is the formula need to use to derive the 6 year spot form the term structures?
Thanks for any help.
