Question

1. Assume that as of today, the annualized interest rate on a three-year security is 8 percent, while the annualized interest rate on a two-year security is 6 percent. Use only this information to estimate the one-year forward rate two years from now.

Answer 1

r1 = 12.11 %

Explanation:

One-year forward rate two years from now = (1+0.08)^3 / ( 1+0.06)^2 - 1

r1 = 1. 2597/1.1236 - 1

r1 = 12.11 %