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Yuri [45]
3 years ago
15

Suppose the spot rates for 1 and 2 years are s1=6.3% and s2=6.9% with annual compounding. recall that in this course interest ra

tes are always quoted on an annual basis unless otherwise specified. what is the forward rate, f1,2 assuming annual compounding?
Business
1 answer:
user100 [1]3 years ago
4 0

Since the problem assumes annual compounding, then the relationship of forward rate and spot rates is given in the equation:

f1,2 = ((s2^2 / s1) - 1)

Therefore,

f1,2 = ((1.069^2 / 1.063) - 1)

f1,2 = 0.075 = 7.5%

Forward rate is 7.5%.

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