According to the expectations theory, which of the following is closest to the one-year implied forward rate
Question:
According to the expectations theory, which of the following is closest to the one-year implied forward rate one year from now? a. 6.58 percent b. 5.75 percent c. 6.25 percent
James Wallace, CFA, is a fixed-income fund manager at a large investment firm. Each year the firm recruits a group of new college graduates. Recently, Mr. Wallace was asked to teach the fixed-income portion of the firm€™s training program. Mr. Wallace wants to start by teaching the various theories of the term structure of interest rates and the implications of each theory for the shape of the Treasury yield curve. To evaluate the trainees€™ understanding of the subject, he creates a series of questions. The following interest rate scenario is used to derive examples on the different theories used to explain the shape of the term structure and for all computational problems in Mr. Wallace€™s lecture. He assumes a rounded day count of 0.5 year for each semiannual period. To read the period column, let€™s look at the 12 × 18 line. The €œ12€ stands for 12 months from now and the €œ18€ stands for 18 months from now. So, the 12 × 18 forward rate is a six-month rate that begins 12 months from now.
Transcribed Image Text:
Period (months) Implied Spot Rates LIBOR Forward Rates 0x 6 5.00% 5.00% 5.25 6x 12 5.50 5.50 12 x 18 6.00 5.75 18 x 24 6.50 5.95 24 x 30 6.75 30 x 36 7.00 6.12
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