The current yield rates for zero-coupon bonds are as follows:

Term (years)	Annual effective yield rate
1	3.5%
2	4.0%
3	4.0%
4	4.5%

Calculate the implied two-year spot rate at the end of year two.

• 1.0%
• 4.0%
• 4.5%
• 5.0%
• 6.0%

Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.

Solution: E

[[math]] \begin{array}{c}{{1.05^{4}=1.04^{2}(1+f)^{2}}}\\ {{f=0.0601}}\end{array} [[/math]]

Copyright 2023 . The Society of Actuaries, Schaumburg, Illinois. Reproduced with permission.