question archive If the two-year spot rate is 4%, the A three-year spot rate is 4
If the two-year spot rate is 4%, the A three-year spot rate is 4
Subject:FinancePrice:2.86 Bought18
If the two-year spot rate is 4%, the A three-year spot rate is 4.5% and the four-year spot rate of 6.1%, determine the forward rate for year 3, f3,4. Hint: you will not need all of the rates given.
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11.05% |
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9.37% |
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7.11% |
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8.55% |
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10.47% |
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The forward rate for year 3, f3,4 is given by:
f3,4 = (1 + r4)^4/(1 + r3)^3 - 1
Where,
r4 = four-year spot rate
r4 = 6.1% = 0.061
r3 = three-year spot rate
r3 = 4.5%
r3 = 0.045
f3,4 = (1 + 0.061)^4/(1 + 0.045)^3 - 1
f3,4 = 1.061^4/1.045^3 - 1
f3,4 = 1.2672477698/1.141166125 - 1
f3,4 = 1.1104849172 - 1
f3,4 = 0.1104849172
f3,4 = 11.04849172%
f3,4 = 11.05%
Option A is correct: 11.05%
