1) Assume that today, the annualized five-year interest rate is 18 percent. A th

Question

1) Assume that today, the annualized five-year interest rate is 18 percent. A three-year security has an annualized interest rate of 17 percent. What is the two-year forward rate three years from now?

2) Assume that today, the annualized 10-year interest rate is 15 percent. A five-year security has an annualized interest rate of 10 percent. What is the five-year forward rate five years from now?

3) Assume that interest rates for one-year securities are expected to be 4 percent today, 6 percent one year from now and 7 percent two years from now. What are the current interest rates on two-year and three-year securities?

Explanation / Answer

1)

Two-year forward rate three years from now:

= ((1+18%)^5/(1+17%)^3)^(1/2)-1

= 19.52%

Hence, Two-year forward rate three years from now is 19.52%

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