Question

Consider the following spot interest rates for maturities of one, two, three, and four years. r3-5.6 % r4= 6.4 % M=4.5% 2- 4.9% What are the following forward rates, where f, 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.) nces 11.1 1,2 f1,3 %

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

A В C D 1 2 Year Spot rate 3 4.50% 1 4 4.90% 2 5.60% 3 6 6.40% 4 7 Forward Rate f1,1 f1,2 8 5.30% 6.15% 10 f1,3 7.04% 11 12 13

Cell reference -

А В C 1 2 Year Spot rate 0.045 3 0.049 4 2 0.056 4 6 0.064 7 8 Forward Rate | (1+C4)^2/ (1+C3 )-1 |=((1+C5)^3/(1+C3) )^{1/2)-1 =(1+C6)^4/ (1+C3))^(1/3)-1 f1,1 f1,2 9 10 f1,3 11 12 13

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.