Use the table for the question(s)below.
Consider the following zero-coupon yields on default-free securities:
-The forward rate for year 5 (the forward rate quoted today for an investment that begins in four years and matures in five years)is closest to:
A)4.0%.
B)3.8%.
C)4.8%.
D)4.2%.

Question

Use the table for the question(s)below.
Consider the following zero-coupon yields on default-free securities: 
-The forward rate for year 5 (the forward rate quoted today for an investment that begins in four years and matures in five years)is closest to:
A)4.0%. 
B)3.8%. 
C)4.8%. 
D)4.2%.

Quizplus · Accepted Answer

The forward rate for year 5 is the rate that would be locked in today for an investment that begins in four years and matures in five years. The forward rate is calculated as the difference between the spot rate for year 5 and the spot rate for year 4. In this case, the spot rate for year 5 is 4.2% and the spot rate for year 4 is 4.0%. Therefore, the forward rate for year 5 is 4.2% - 4.0% = 0.2%.

Use the Table for the Question(s)below