The one-year interest rate is 4.80% and the two-year interest rate is 5.13%. What is the one-year interest rate one year from now? Assume the rates are effective annual rates.

Question

Quizplus · Accepted Answer

We can use the formula: (1+ r2)^2 = (1+ r1)(1+ rx)
Where r1 is the one-year interest rate, r2 is the two-year interest rate, and rx is the unknown one-year interest rate one year from now.

Plugging in the given values, we get:
(1+ 0.0513)^2 = (1+ 0.048)(1+ rx)
1.1094769 = 1.09824(1+ rx)
1.1094769/1.09824 = 1+ rx
rx = 0.01014 or 1.014%

Therefore, the one-year interest rate one year from now is 5.13% + 1.014% = 5.144%, which is closest to choice (C) 5.46%.

The One-Year Interest Rate Is 4