Suppose the current seven-year rate is 8 percent and the current six-year rate is 6 percent. What is the one year forward rate for six years?
A) 16.33 percent
B) 18.22 percent
C) 20.82 percent
D) 14.65 percent
E) 15.14 percent

Question

Quizplus · Accepted Answer

According to the formula for calculating the one-year forward rate for six years:

(1 + r7)^7 = (1 + r6)^6(1 + f1,6)

Where r7 is the current seven-year rate, r6 is the current six-year rate, and f1,6 is the one-year forward rate for six years.

Plugging in the given values:

(1 + 0.08)^7 = (1 + 0.06)^6(1 + f1,6)

Solving for f1,6:

f1,6 = [(1 + 0.08)^7 / (1 + 0.06)^6] - 1 = 0.2082 or 20.82%

Therefore, the answer is (C) 20.82 percent.

Suppose the Current Seven-Year Rate Is 8 Percent and the Current