Estimate the year 2 forward rate given:
2 year zero-coupon will earn 3.0%
1 year zero-coupon will earn 2.5%
A)2.0%
B)0.5%
C)3.5%
D)- 3.4%

Question

Quizplus · Accepted Answer

The 2-year forward rate can be calculated using the formula: $(1 + z_2)^2 = (1 + z_1)(1 + f_{1,2})$, where $z_2$ is the 2-year zero-coupon rate, $z_1$ is the 1-year zero-coupon rate, and $f_{1,2}$ is the 1-year forward rate starting one year from now. Plugging in the given rates: $(1 + 0.03)^2 = (1 + 0.025)(1 + f_{1,2})$. Solving for $f_{1,2}$ gives approximately 3.5%.

Estimate the Year 2 Forward Rate Given