r 1 = 5.4% r 2 = 5.9% r 3 = 6.6% r 4 = 7.4% What are the following forward rates
ID: 2721121 • Letter: R
Question
r1 = 5.4% r2 = 5.9% r3 = 6.6% r4 = 7.4%
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.)
F1,1 = 6.4 %
F1,2 is not 8.01
F1, 3 is not 9.84
Consider the following spot interest rates for maturities of one, two, three, and four years.r1 = 5.4% r2 = 5.9% r3 = 6.6% r4 = 7.4%
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
Answer: F1,1 =[(1+R2)^2/(1+R1)]1/1-1
=[(1.059)^2/(1.054)]-1
=6.4%
F1,2=[(1+R3)^3/(1+R1)^1]1/2-1
=[(1.066)^3/(1.054)^1]1/2-1
=7.21%
F1,3=[(1+R4)^4/(1+R1)^1]1/3-1
=[(1.074)^4/(1.054)^1]1/3-1
=8.07%
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