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Q: If the 3-year spot rate is 3.00%/year and the 5-year spot rate is 5.00%/year what...

Q: If the 3-year spot rate is 3.00%/year and the 5-year spot rate is 5.00%/year what is the 2-year rate 3-years forward?

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Answer #1

Solution:

3-year spot rate: 3.00%/year

5-year spot rate: 5.00%/year

We know that;

(5 year spot) = (3 year spot rate) * (2-year rate 3-years forward)

( 1+ 0.05 )5 = ( 1 + 0.03 )3 * ( 1+ 2 year rate 3 year forward)2

( 1+ 2 year rate 3 year forward)2 = ( 1+ 0.05 )5 / ( 1 + 0.03 )3

( 1+ 2 year rate 3 year forward)2 = 1.2762 / 1.0927

( 1+ 2 year rate 3 year forward)2 = 1.1679

( 1+ 2 year rate 3 year forward) = 1.0806

2 year rate 3 year forward = 1.0806 - 1

2 year rate 3 year forward = 0.0806 or 8.06 %

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