Question

assume that as of today, the annualized two-year interest rate is 13 percent and the one-year interest rate is 12 percent. use this information to estimate the one-year forward rate

Answer 1

14.01%

Step-by-step explanation:

Given

R1 = Rate1 = 2 years interest

R2 = Rate 2 = 1 year interest

R1 = 13%

R1 = 0.13

R2 = 12%

R2 = 0.12

the one-year forward rate is calculated by

( 1 + R2)²/(1 + R1)

= (1 + 0.13)²/(1 + 0.12)

Forward Rate = 1.13²/1.12

Forward Rate = 1.2769/1.12

Forward Rate = .0140089

Forward Rate = 14.0089%

Forward Rate = 14.01% ---- Approximated

Hence, the one year forward rate is 14.01%