A 1-year zero coupon bond has a yield of 6%. A 7-yr zero coupon bond has a yield of 6.25%. Confirm that 6 year forward rate starting 1...

The key thing
to understand here is what we're talking about when we say "forward rate".


The yield of a given bond is fairly straightforward; since these are
zero-coupon bonds, they don't pay out anything until they mature, at which point they will pay
out the original value plus their yield. For the 1-year bond we can just read this off; 6% yield
means that we'll receive 1.06 times the original value when the bond matures. Yields are
calculated on a per-year basis (APR, "annual percentage yield"), so the 7-year bond
will pay out 1.0625^7 = 1.5286 times its purchase price.

The forward rate is
a somewhat trickier concept, however; it's the expected yield that a bond
should have if we buy it at some point in the future. In order to price
the forward rate, we use the...