Question

In: Finance

following yield curve interest rate 1% 2% 3% And that the FRA (1 year, starting two...

following yield curve

interest rate

1%

2%

3%

And that the FRA (1 year, starting two year from now) is 4%

Calculate the implicit 1 year interest rate that we are expecting for next year and next next year

Expert Solution

A)One year interest rate for next year :[1+i2]^2/[1+i1]^1 -1

=[1+.02]^2/[1+.01]^1 -1

=[1.02]^2/[1.01]^1 -1

= 1.0404/1.01 - 1

= 1.0301-1

= .0301 or 3.01%

b)One year interest rate fir next next year = [1+y3]^3/[1+y2]^2 -1

=[1+.03]^3/[1+.02]^2 -1

=[1.03]^3/[1+.02]^2 -1

= 1.092727/1.0404 -1

= 1.0503-1

= .0503 or 5.03%

jeff jeffy answered 1 year ago

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