Had enough yet? Okay, plow on for more you have the following assumptions and sp

Question

Had enough yet? Okay, plow on for more you have the following assumptions and spot rates-solve for the implied forward rates One-year rate Two-year rate Three-year rate Four-year rate 0.880% 1.140% 1.360% 1.860% 2?? Implied forward 1 year rate i at time t+1 fin one year) at time t+2 (in two years) at time t+1 (in one year) at time t+3 (in three years) at time t+2 (in two years) Implied forward 1 year rate mf Implied forward 2 year rate /i Implied forward 1 year rate msfi Implied forward 2 year rate m2

Explanation / Answer

Let implied forward 1 year rate is r, then (1+0.88%)*(1+r) = (1+1.14%)^2

r = 1.4%

Now let implied forward 1 year rate at time t+2 is r, then (1+1.14%)^2*(1+r) = (1+1.36%)^3

r = 1.8%

Now let implied forward 2 year rate at time t+1 = r, then (1+0.88%)*(1+r)^2 = (1+1.36%)^3

r= 1.34%

Implied forward 1 year rate, at time t+3 is r; then (1+1.36%)^3*(1+r) = (1+1.86%)^4

r = 3.37%

Let implied forward 2 year rate, 2 year from now is r; then (1+1.14%)^2*(1+r)^2 = (1+1.86%)^4

r = 2.58%

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