Question

Question 32 1 pts The one year spot interest rate is 1.75% and the one year forward rate next year is 2.50%. According to the expectations theory. what is the current two-year rate? 3.20% 2.12% 1.98% 1.77%

Answer 1

Forward rate = [(1 + r2)^n) / (1 + r1)^n] - 1

0.025 = [(1 + r2)^2) / (1 + 0.0175)^1] - 1

1.025 = [(1 + r)^2) / (1 + 0.0175)^1]

1.042938 = (1 + r)^2

1.0212 = 1+ r

r = 00212 or 2.12%

Two year rate = 2.12%