Question 4.a)The one-year and two-year zero rates are 1% and 2% respectively. Whatis the one-year forward one-year rate (that is,f11? Assume all rates are annuallycompounded. (This is a favorite question for interviewers.b) If the two-year forward one-year ratef21is 3%, what is the three-year zero rate

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Asked Sep 30, 2019

Question 4.a)The one-year and two-year zero rates are 1% and 2% respectively. Whatis the one-year forward one-year rate (that is,f11? Assume all rates are annuallycompounded. (This is a favorite question for interviewers.

b) If the two-year forward one-year ratef21is 3%, what is the three-year zero rate

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Expert Answer

Step 1

a.

Calculate the one-year forwa...

(1+S,)
(1+S)
i=
(1+2%)
-1
(1+1%
1.0404
-1
1.01
=1.03009900990099-1
0.03009900990099 or 3.01%
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(1+S,) (1+S) i= (1+2%) -1 (1+1% 1.0404 -1 1.01 =1.03009900990099-1 0.03009900990099 or 3.01%

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