You note the following yield curve in The Wall Street Journal. According to the unbiased expectations hypothesis, what is the one-year forward rate for the period beginning one year from today, ₂f₁?
$\begin{array}{l}\begin{array} { l l } \text {Maturity }&\text {Yield}\\\text {One day }&3.00\%\\\text {One year }&5.00\\\text {Two years }&6.25\\\text {three years }&8.00\\\end{array}\end{array}$

Question

You note the following yield curve in The Wall Street Journal. According to the unbiased expectations hypothesis, what is the one-year forward rate for the period beginning one year from today, ₂f₁?

\begin{array}{l}\begin{array} { l l } \text {Maturity }&\text {Yield}\\\text {One day }&3.00\%\\\text {One year }&5.00\\\text {Two years }&6.25\\\text {three years }&8.00\\\end{array}\end{array}

Quizplus · Accepted Answer

The unbiased expectations hypothesis suggests that the forward rate can be calculated using the formula: (1 + 2-year yield)^2 = (1 + 1-year yield) * (1 + forward rate). Solving for the forward rate: (1.0625)^2 = (1.05) * (1 + forward rate), which gives a forward rate of approximately 7.51%.

You Note the Following Yield Curve in the Wall Street