The current required yields on one- and two-year government bonds are i₁ = 12 per cent and i₂ = 13 per cent. What are the market's expectations of the one-year forward rate, f₁ (round to two decimals)?

Question

Quizplus · Accepted Answer

The formula for calculating the one-year forward rate is: f₁ = [(1 + i₂)^2 / (1 + i₁)] - 1 f₁ = [(1 + 0.13)^2 / (1 + 0.12)] - 1 = 14% Therefore, the market's expectations of the one-year forward rate is 14%, which corresponds to answer choice B.

The Current Required Yields on One- and Two-Year Government Bonds