A two-year STRIPS sells at an interest rate of 3.84 percent and a three-year STRIPS sells at a rate of 3.97 percent.What is the implied one year interest rate two years from now? Assume the rates are effective annual rates.
A) 4.23 percent
B) 4.36 percent
C) 4.41 percent
D) 4.45 percent
E) 4.50 percent

Question

Quizplus · Accepted Answer

(1 + 0.0397)³ = (1 + 0.0384)²(1 + f_2,1) f_2,1 = 4.23 percent

A Two-Year STRIPS Sells at an Interest Rate of 3