(a) Compute 1.year Forward Rate of Interest, excluding the Liquidity Premium (LP

Question

(a) Compute 1.year Forward Rate of Interest, excluding the Liquidity Premium (LP). (b) Re-estimate the 1 -Year Forward Rate of Interest including the L.P. 29. Answer questions a and b regarding Forward Rates. (a). Assume the annualized interest rate on a 5-year CD is 1.15% and the annualized rate is 1.05% for a 4-year CD. Estimate the 1-year Forward Rate four years from now. Provide answer in annual percentage rate form (e.g., 0.0110 decimal = 1.10% percentage). (b). Use the Example on page 59 of our textbook and recalculate the 1-year Forward Rate if the current 1-year rate is 8.5% and the Liquidity Premium (LP) is 0.45%. The current 2-Year Rate remains at 10.0%. Provide Answer in annual percentage rate form (e.g., 0.0110 = 1.10%).

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