John is analyzing the term structure of interest rates for a fixed-income investment strategy. He considers the implications of forward rates derived from yield curves. Based on the current term structure, the following rates are observed: 1-year spot rate (S1) = 2.5% 2-year spot rate (S2) = 3.0% 3-year spot rate (S3) = 3.5% Using these rates, John wants to determine the 1-year forward rate that starts in one year (F1,2). Which of the following forward rates is correctly derived based on the above information?

Exam

CFA Level 2

Section

Difficulty

Fixed Income

Calculating 1-Year Forward Rate

Very Hard Term Structure Dynamics Forward Rates

John is analyzing the term structure of interest rates for a fixed-income investment strategy. He considers the implications of forward rates derived from yield curves. Based on the current term structure, the following rates are observed:

1-year spot rate (S1) = 2.5%
2-year spot rate (S2) = 3.0%
3-year spot rate (S3) = 3.5%

Using these rates, John wants to determine the 1-year forward rate that starts in one year (F1,2). Which of the following forward rates is correctly derived based on the above information?

3.5%

3.0%

2.5%

Hint

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