Question

You note the following yield curve in The Wall Street Journal. According to the unbiased expectations theory, what is the one-year forward rate for the period beginning two years from today, 3f1?

Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16))
Maturity Yield
One day 1.10%
One year 1.62
Two years 1.86
Three years 1.97
One-year forward rate %

Answer 1

The one-year forward rate for the period beginning two years from today is : 2.19%.

Step-by-step explanation:

One-year forward rate from the period beginning two years from today is denoted as 2f1;

Three-year forward rate from today is denoted as : 1f3;

Two-year forward rate from today is denoted: 1f2;

Under the unbiased expectations theory, we have:

( 1 + 1f2) ^2 * (1+2f1) = (1+1f3)^3 <=> ( 1 + 1.86%) ^2 * (1 + 2f1) = (1+ 1.97%)^3 <=> 1+2f1 = 1.0219 <=> 2f1 = 2.19%

So, the answer is 2.19%.