1.The 6-month Treasury bill spot rate is 4 percent, and the 1-year Treasury bill
ID: 2757933 • Letter: 1
Question
1.The 6-month Treasury bill spot rate is 4 percent, and the 1-year Treasury bill spot rate is 5 percent. The implied 6-month forward rate 6 months from now is which of the following? a. 3.0 percent b. 4.5 percent c. 5.5 percent d. 5.9 percent.
2.
Forward Rates (LO3, CFA8) An analyst gathers the following information:
Based on the data above, the one-year implied forward rate two years from now is closest to:
a.
6.25 percent
b.
7.01 percent
c.
7.26 percent
d.
7.51 percent
3.
Forward Rates (LO3, CFA8) An analyst gathered the following spot rates:
The one-year forward rate two years from now is closest to
a.
4.91 percent
b.
5.17 percent
c.
10.05 percent
d.
7.5 percent
a.
6.25 percent
b.
7.01 percent
c.
7.26 percent
d.
7.51 percent
3.
Forward Rates (LO3, CFA8) An analyst gathered the following spot rates:
d
The one-year forward rate two years from now is closest to
a.
4.91 percent
b.
5.17 percent
c.
10.05 percent
d.
7.5 percent
Explanation / Answer
Solution:
1) Correct Answer is d. 5.9%
6 Month Treasury bill Spot Rate = 4%
1 Year Treasury bill spot rate = 5%
Implied 6-month forward rate 6 months from now = (1 + 6 month rate) x (1 + 6 month forward rate 6 month from now) = (1 + 1 Year Rate)
(1 + 0.04x6/12) x (1 + 6 month forward rate 6 month from now) = (1 + 0.05)
1 + R x 6/12 = 1.05 / 1.02
1 + 0.5R = 1.029412
0.5R = 0.02941
R = 0.05882 or 5.9%
2) one-year implied forward rate two years from now is closest to d. 7.51 percent
Let one-year implied forward rate two years from now = R
(1 + 2 Year Rate)2 x (1 + 1 Year Implied Forward Rate two years from now) = (1 + 3 Year Rate)3
(1 + 0.06)2 x (1 + R) = (1 + 0.065)3
1.1236 x (1+R) = 1.20795
1 + R = 1.20795 / 1.1236
1 + R = 1.0750
R = 1.0751 – 1 = 0.0751 or 7.51%
3) one-year forward rate two years from now is closest to b. 5.17 percent
Let one-year forward rate two years from now = R
(1 + 2 Year Rate)2 x (1 + 1 Year Forward Rate two years from now) = (1 + 3 Year Rate)3
(1 + 0.125)2 x (1 + 1 Year Forward Rate two years from now) = (1 + 0.10)3
1.265625 x (1 + R) = 1.331
1 + R = 1.331 / 1.265625
1 + R = 1.0561654
R = 1.0561654 – 1 = 0.561654 or 5.61%
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