Forward Rate. a. Assume that as of today, the annualized two-year interest rate is 0.11 ,...

Forward Rate. a. Assume that as of today, the annualized two-year interest rate is 0.11 , while the one-year interest rate is 0.02. Use only this information to estimate the one-year forward rate. Enter the answer in decimal form using 4 decimals (e.g. 0.1234)

Solutions

Expert Solution

We are given

2 year spor rate (S2) = 11%

1 year spot rate(S1) = 2%

We need to find one year forward rate one year from now(F11) for which we will use this formula-

(1+S2)^2 = (1+S1)*(1+F11)

((1.11)^2)/ 1.02 = 1 + F11

0.2079 = F11

jeff jeffy answered 2 years ago

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