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following yield curve interest rate 1% 2% 3% And that the FRA (1 year, starting two year from now) is 4% Calculate...

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Finance

  1. following yield curve

interest rate

1%

2%

3%

And that the FRA (1 year,starting two year from now) is 4%

  1. Calculate the implicit 1 year interest rate that we areexpecting for next year and next next year

Answer & Explanation Solved by verified expert
4.1 Ratings (805 Votes)

A)One year interest rate for next year :[1+i2]^2/[1+i1]^1      -1

                                =[1+.02]^2/[1+.01]^1    -1

                                =[1.02]^2/[1.01]^1        -1

                                 = 1.0404/1.01            - 1

                               = 1.0301-1

                              = .0301 or 3.01%

b)One year interest rate fir next next year = [1+y3]^3/[1+y2]^2     -1

                          =[1+.03]^3/[1+.02]^2     -1

                           =[1.03]^3/[1+.02]^2      -1

                           = 1.092727/1.0404    -1

                           = 1.0503-1

                          = .0503 or 5.03%
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Transcribed Image Text

following yield curveinterest rate1%2%3%And that the FRA (1 year,starting two year from now) is 4%Calculate the implicit 1 year interest rate that we areexpecting for next year and next next year

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