Question

The 2-year spot interest rate is 6.34% and the 5-year spot interest rate is 6.15%. What is the implied forward rate on a 3-year bond originating 2 years from now? O A 5.9% 8.6.14 OC. 6.8% one of the above Reset Selection Question 3 of 4 2.5 Points The bank forecasts the following one-year interest rates one and two years in the future: 4.85% and 5.20%. The current one-year interest rate is 4.56%. Estimate the annual three-year interest rate using the expectations theory. B. DO 51
please show all work

Answer 1

Forward rate for n years m years from now=((1+n+m year rate)^(n+m)/(1+m year rate)^m)^(1/n)-1

1.
Option B
=(1.0615^5/1.0634^2)^(1/3)-1=6.02%

2.
Option C
=(1.0485*1.052*1.0456)^(1/3)-1=4.87%

3.
Option A
=(1.0456^7/1.0513^3)^(1/4)-1=4.13%