r 1 = 3.8% r 2 = 4.2% r 3 = 4.9% r 4 = 5.7% What are the following forward rates
ID: 2709065 • Letter: R
Question
r1 = 3.8% r2 = 4.2% r3 = 4.9% r4 = 5.7%
What are the following forward rates, where f1, k refers to a forward rate for the period beginning in one year and extending for k years? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
Consider the following spot interest rates for maturities of one, two, three, and four years.r1 = 3.8% r2 = 4.2% r3 = 4.9% r4 = 5.7%
What are the following forward rates, where f1, k refers to a forward rate for the period beginning in one year and extending for k years? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
Explanation / Answer
Formula for calculation of forward rate over a period of time when spot rate is given as under
Fn = (1+rn )n / (1+rn-1)n-1 -1
Where Fn= Forward rate over the nth year ,
‘rn = spot rate for n – year
‘rn-1 = spot rate for n-1 year
‘r1 = 3.8 %, ‘r2 = 4.2 %, ‘r3 = 4.9%, ‘r4 = 5.7 %
‘f1 1 = (1.038)-1 = 3.8 %
‘f1,2 = [(1.042)2 / (1.038)] -1 = 4.60 %
‘f1,3 = [(1.049)3/(1.042)2] -1 = 6.31 %
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