Estimation of 20 year interest rate
Quantitative Finance
Level
2
Assume that a 10-year annually compounded interest rate is 10%. Given there is no market data available for R20, the 20-year interest rate, how would you estimate the 20-year rate in percentage terms ?
The answer is 4.880888.
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From the compound interest formula, we get ( 1 + 1 0 1 ) 1 0 = ( 1 + 1 0 0 r ) 2 0 , where r is the twenty year rate of interest. So r = 1 0 0 ( √ 1 0 1 1 − 1 ) = 4 . 8 8 0 8 8