The current 3-year spot rate is 4% and current 5-year spot rate is 5.5%. Accordi

Question

The current 3-year spot rate is 4% and current 5-year spot rate is 5.5%. According to the pure expectation theory of the term structure of interest rates, what is the forward rate for 1-year securities beginning four years from today?

____

A)        7.79%

B)        8.23%

C)        10.14%

D)        9.58%

The Windsor Honda offers payments of $493.19 per month for 48 months on a 2018 Civic at the complete price of $21,000 with zero down. What is the annual percentage rate (APR) of this loan?

____

A)        12%

B)        11%

C)        9%

D)        6%

Canadian law requires interest on fixed-rate mortgages to be compounded semi-annually. With an effective annual rate of 5.65%, what is the posted annual percentage rate?

____

Undetermined

5.725%

5.572%

5.257%

Hint:    Rear = [1 + Rapr/m]m -1

Explanation / Answer

2 years interest rate 3 years from now:

= (1+5.50%)^5/(1+4%)^3-1

= 0.1618826

1 year interest rate:

= 0.1618826^(1/2)

= 0.0779

Hence, correct option is (A) 7.79%

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