The annualized yield on a two-year security is below the annualized one-year interest rate. The one-year forward rate as of one year ahead is ______________.
A)zero
B)negative
C)positive, but below the annualized one-year interest rate
D)None of these are correct

Question

Quizplus · Accepted Answer

Given that the annualized yield on a two-year security is below the annualized one-year interest rate, the one-year forward rate one year from now must be positive to compensate for the lower yield on the two-year security, but it will be below the current annualized one-year interest rate to reflect the expectation of lower rates in the future.

The Annualized Yield on a Two-Year Security Is Below the Annualized