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CFA Level 2
Fixed Income

Calculating Forward Rates from Spot Rates

Medium Term Structure Dynamics Forward Rates

As a fixed income analyst at a large investment firm, you analyze the term structure of interest rates to forecast future interest rate movements. Currently, the 1-year spot rate is 2%, and the 2-year spot rate is 3%. You want to calculate the 1-year forward rate one year from now (f1,1). This forward rate can help you understand market expectations for interest rates in the future.

Using the appropriate formula for calculating forward rates, what is the 1-year forward rate one year from now?

Hint

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% Correct62%