If the one-year spot interest rate is 6% and two-year spot interest rate is 7%, calculate the one-year forward interest rate one year from today (approximately):
A) 6%
B) 7%
C) 8%
D) None of the above

Question

Quizplus · Accepted Answer

The one-year forward interest rate one year from today can be calculated using the formula:

Forward rate = [(1 + two-year spot rate)^2 / (1 + one-year spot rate)] - 1

Substituting the given values, we get:

Forward rate = [(1.07)^2 / (1.06)] - 1

Forward rate = 1.1422 - 1

Forward rate = 0.1422 or 14.22%

Rounding the value to the nearest percent, we get the answer as 8%. Hence, the best choice is C) 8%.

If the One-Year Spot Interest Rate Is 6% and Two-Year