Question 3.3

Juanita would like to invest a certain amount of money for three years and considers investing in a one-year bond that pays 6 percent. Juanita would then like to buy a second one-year bond that is expected to pay the one-year forward rate one year from now, and finally a third one-year bond that is expected to pay the one-year forward rate two years from now. (Hint: Assume that 2-year bonds and 3-year bonds both yield 8.000%.)

If the annualized interest rate on a three-year bond is 8 percent, the forward rate of a one-year security beginning two years from now is ____ percent.