11-86 If the spot interest rate on a prime?rated one-month CD is 6 percent today and the market rate on a two-month maturity prime?rated CD is 7 percent today,the implied forward rate on a one-month CD to be delivered one month from today is

Question

Quizplus · Accepted Answer

The implied forward rate can be calculated using the formula:

(1 + r2)^2 / (1 + r1) = (1 + f)

where r1 is the spot rate for a one-month CD today, r2 is the spot rate for a two-month CD today, and f is the implied forward rate for a one-month CD delivered in one month.

Plugging in the given values, we get:

(1 + 0.07)^2 / (1 + 0.06) = (1 + f)

1.1521 / 1.06 = (1 + f)

f = 0.08 or 8%

Therefore, the answer is E.

11-86 If the Spot Interest Rate on a Prime?rated One-Month