Problem 1: Follow the (Yield) Curve uppose that the yield curve for the next 3 years is given by (there are no liquidity premia): 1. Calculate the forward rate for one year, one year from now f1,1. According to the arbitrage argument, investing for two years in r2 or for one year in r1 and then another year in f1,1 should provide the same return. (1+r2)2=(1+r1)(1+f1,1)(1+0.08)2=(1+0.06)(1+f1,1)1+f1,1=1.06(1.08)2=1.10037f1,1=0.10037or10.04%