If a bank is asked to quote a rate on a one-year loan one year from today and the current interest rate on a one-year loan is 7 percent and a two-year loan is 8 percent, it should quote 9 percent.
A one-year loan one year from today: [(1.08)^2/(1.07)] - 1 = 0.09 = 9%.

Question

Quizplus · Accepted Answer

This calculation uses the formula for the forward rate, which takes into account the current interest rates and the expected future interest rates. The calculation is correct and results in a quoted rate of 9 percent for a one-year loan one year from today.

If a Bank Is Asked to Quote a Rate on a One-Year