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20 January, 09:54

Suppose the spot rates for 1 and 2 years are s1=6.3% and s2=6.9% with annual compounding. recall that in this course interest rates are always quoted on an annual basis unless otherwise specified. what is the forward rate, f1,2 assuming annual compounding?

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  1. 20 January, 12:26
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    Since the problem assumes annual compounding, then the relationship of forward rate and spot rates is given in the equation:

    f1,2 = ((s2^2 / s1) - 1)

    Therefore,

    f1,2 = ((1.069^2 / 1.063) - 1)

    f1,2 = 0.075 = 7.5%

    Forward rate is 7.5%.
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