If three-year securities are yielding 6% and two-year securities are yielding 5.5%, what is the expected one-year rate two years from now as implied by the two actual rates above?
A) 4.7%
B) 5.8%
C) 6.5%
D) 7.0%
E) 7.5%

Question

Quizplus · Accepted Answer

The expected one-year rate two years from now can be calculated using the formula for forward rates: (1 + 3-year rate)^3 = (1 + 2-year rate)^2 * (1 + forward rate). Solving for the forward rate gives approximately 7.0%.

If Three-Year Securities Are Yielding 6% and Two-Year Securities Are