The current required yields on one- and two-year government bonds are i₁ = 12% and i₂ = 13%.What are the market's expectations of the one-year forward rate, f₁ (round to two decimals)?

Question

Quizplus · Accepted Answer

The formula for calculating the one-year forward rate is (1 + i₂) = (1 + i₁) × (1 + f₁). Solving for f₁, we get f₁ = 0.13 × 1.12 - 1 = 0.14 or 14%. Therefore, the best choice is B.

The Current Required Yields on One- and Two-Year Government Bonds