Question

1) The 9-year spot interest rate is 5.44%, the 3-year spot rate is 3.61%. What is the forward rate you can find using the pure expectations theory? Round to the nearest 0.01%. E.g., if your answer is 5.78%, enter it as 5.78.

2) The 8-year spot interest rate (the longer of the spot rates, or the n-year rate) is 5.35% and the 3-year (k-year) forward rate expected (n - k) years from now has been estimated to be 6.98%. What is the other spot rate you need to know to find the forward rate given above using the pure expectations theory? Round to the nearest 0.01%. E.g., if your answer is 5.785%, record it as 5.79.

3) The 2-year spot interest rate is 5.2%, the 3-year forward rate expected 2 years from now has been estimated to be 5.17%. What is the other spot rate you need to know to find the forward rate given above using the pure expectations theory? Round to the nearest 0.01%. E.g., if your answer is 5.783%, record it as 5.78.

Answer 1

1)

6-year forward rate in 3 years:

= ((1+5.44%)^9/(1+3.61%)^3)^(1/6)-1

= 6.37%

Hence, 6-year forward rate in 3 years is 6.37%