Give two interpretations for the following forward rate: The two-year forward rate one year from now is 2%.

Question

Quizplus · Accepted Answer

The Answer is For the two-year forward rate one year from now of 2%, the two interpretations are as follows:
• 2% is the rate that will make an investor indifferent between buying a three-year zero-coupon bond or investing in a one-year zero-coupon bond and when it matures reinvesting in a zero-coupon bond that matures in two years.
• 2% is the rate that can be locked in today by buying a three-year zero-coupon bond rather than investing in a one-year zero-coupon bond and when it matures reinvesting in a zero-coupon bond that matures in two years.

Give Two Interpretations for the Following Forward Rate: the Two-Year