Currently, 1-yr interest rate is 4%, 2-yr rate is 4.5% and 3-yr rate is 5%. Calculate...
Currently, 1-yr interest rate is 4%, 2-yr rate is 4.5% and 3-yr rate is 5%. Calculate the forward rate between yr-2 and yr-3.
4.5%
5.0%
5.5%
6.0%
Homework Answers
Based on Pure Expectations Theory,
(1 + 3 Yr Rate)3 = (1 + 2 Yr Rate)2 * (1 + 1 Yr Rate 2 Yr from now)
(1 + 5%)3 = (1 + 4.5%)2 * (1 + 1 Yr Rate 2 Yr from now)
(1 + 1 Yr Rate 2 Yr from now) = 1.157625/1.092025
(1 + 1 Yr Rate 2 Yr from now) = 1.060072
1 Yr Rate 2 Yr from now = 6.00%
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