Forward Rate Calculation

Easy Term Structure Dynamics Forward Rates

Consider a risk-free bond that matures in 2 years, with a yield of 2% per annum. Additionally, a bond that matures in 1 year has a yield of 1.5% per annum. Using these yields, which of the following statements is true regarding the forward rate from year 1 to year 2?

The forward rate from year 1 to year 2 is 2.5%.

The forward rate from year 1 to year 2 is 2%.

The forward rate from year 1 to year 2 is 1.5%.

Hint

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