If a bank is asked to quote a rate on a one-year loan one year from today and the current interest rate on a one year loan is 7% and a two year loan is 8 %, it should quote 9%.
One year loan one year from today: [(1.08)^2/(1.07)] - 1 = 0.09 = 9%

Question

Quizplus · Accepted Answer

The calculation provided is correct and results in a rate of 9%, so the bank should quote that rate for a one-year loan one year from today based on the current interest rates for one-year and two-year loans.

If a Bank Is Asked to Quote a Rate on a One-Year