If the one-year spot interest rate is 6% and the two-year spot interest rate is 7%,calculate the one-year forward interest rate one year from today.
A)6.5%
B)7.0%
C)7.5%
D)8.0%

Question

Quizplus · Accepted Answer

According to the formula for calculating the one-year forward rate one year from today, 
(1 + 2-year spot rate)^2 = (1 + 1-year spot rate) * (1 + 1-year forward rate)
(1.07)^2 = (1.06) * (1 + 1-year forward rate)
1 + 1-year forward rate = (1.07^2)/1.06
1 + 1-year forward rate = 1.07547
1-year forward rate = 0.07547 or 7.547%
Rounding off, the answer is 7.5%, which is option C.

If the One-Year Spot Interest Rate Is 6% and the Two-Year