A one-year zero-coupon bond yields 4.0%. The two- and three-year zero-coupon bonds yield 5.0% and 6.0%, respectively.

Question:

The forward rate for a two-year loan beginning in one year is closest to:

A. 5.0%.

B. 6.0%.

C. 7.0%.

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The forward rate for a twoyear loan beginning in one year can be calculated using the yields on the oneyear and threeyear zerocoupon bonds The formula for the forward rate FF is given by F1r221r11F1r11r221 where r1r1 is the yield on the oneyear bond and r2r2 is the yield on the threeyear bond Lets calculate ...View the full answer

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