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, 3 f1? (LG 2-8) Maturity Yield One day 2.00% One year 5.50 Two years 6.50 Three years 9.00

Answer 1

Answer:

7.51%

Explanation:

According to the situation, The computation of one-year forward rate for the period beginning two years from today is shown below:-

$_1R_2 = Two\ years\ rate = ((1 + One\ year\ rate)\times (1 +_2f_1)^\frac{1}{2} - 1$

$_1R_2 = 0.065 = ((1 + 0.55)\times (1 +_2f_1)^\frac{1}{2} - 1$

$= \frac{= 1.065^2}{= 1.055} - 1 = _2f_1 = 7.51%$

= 7.51%

Therefore for computing the one-year forward rate for the period beginning two years from today we simply applied the above formula.

Hence, the one year forward rate is 7.51%