The following is information on current spot and forward term structures (assume the corporate debt pays interest annually):

-Calculate the value of x (the implied forward rate on one-year maturity Treasuries to be delivered in one year).

Question

The following is information on current spot and forward term structures (assume the corporate debt pays interest annually):
 
-Calculate the value of x (the implied forward rate on one-year maturity Treasuries to be delivered in one year).

Quizplus · Accepted Answer

11efb884_e035_0736_ba2a_d37122fa8c1b_TB1314_00 To calculate the implied forward rate on one-year maturity Treasuries to be delivered in one year, we use the formula:

(1+x)^2 = (1+5.5/100) x (1+y/100)

Where x is the one-year interest rate one year from now (the implied forward rate), y is the two-year interest rate today, and 5.5/100 is the one-year interest rate today.

Simplifying and solving for x, we get:

x = (1+5.5/100)^(1/2) x (1+y/100)^(1/2) - 1

Plugging in y = 11% (since this is the two-year interest rate given in the problem), we get:

x = (1+5.5/100)^(1/2) x (1+11/100)^(1/2) - 1

x ≈ 6.53 percent. Therefore, the correct answer is A: 6.53 percent.

The Following Is Information on Current Spot and Forward Term