Assume that the current one-year rate is 5% and the two-year rate is 7%.Given this information,the one-year rate expected one year from now is
A)5%.
B)6%.
C)7%.
D)9%.
E) 12%.

Question

Quizplus · Accepted Answer

The expected one-year rate one year from now can be calculated using the formula for forward rates: (1 + two-year rate)^2 = (1 + current one-year rate) * (1 + expected one-year rate). Solving for the expected one-year rate gives approximately 9%.

Assume That the Current One-Year Rate Is 5% and the Two-Year