If the one-year spot interest rate is 8 percent and the two-year spot interest rate is 9 percent, calculate the one-year forward interest rate one year from today.
A)10 percent
B)10.5 percent
C)11 percent
D)11.5 percent

Question

Quizplus · Accepted Answer

The one-year forward rate one year from today can be calculated using the formula that equates the total return from investing in a two-year spot rate with the total return from investing in a one-year spot rate and then reinvesting the proceeds for another year at the forward rate. Mathematically, this can be represented as (1 + two-year spot rate)^2 = (1 + one-year spot rate) * (1 + one-year forward rate). Plugging in the given rates: (1 + 0.09)^2 = (1 + 0.08) * (1 + forward rate). Solving for the forward rate gives approximately 10 percent.

If the One-Year Spot Interest Rate Is 8 Percent and the Two-Year