Answer:
The forward rate of interest for the second year is;
a. 10.01%
Step-by-step explanation:
Step 1: Determine the 1 year final value of the investment
The formula for calculating the final value for the 1 year investment is;
F.V=P.V(1+r)
where;
F.V=final value
P.V=present value
r=yield to maturity
In our case;
F.V=unknown
P.V=x
r=8%=8/100=0.08
replacing;
F.V=x(1+0.08)=1.08 x
Step 2: Determine the 2 year final value of the investment
Using the formula;
F.V=P.V(1+r)²
where;
F.V=unknown
P.V=x
r=9%=9/100=0.09
replacing;
F.V=x(1+0.09)²=1.1881 x
Step 3: Determine the forward rate of interest for the second year
The forward rate of interest can be expressed as;
forward rate of interest=(2-year future value/1-year future value)-1
replacing;
forward rate of interest=(1.1881 x/1.08 x)-1=0.10009×100=10.01%
forward rate of interest=10.01%