You note the following yield curve in The Wall Street Journal. According to the unbiased expectations theory, what is the 1-year forward rate for the period beginning one year from today, 2f1? (Round your answer to 2 decimal places.)
Maturity Yield
One day 2.50%
One year 6.00
Two years 7.00
Three years 9.50
Forward rate %
14.10
To calculate the 1-year forward rate starting one year from today (2f1), you can use the unbiased expectations theory. The unbiased expectations theory suggests that the forward rates can be estimated by taking the expected future spot rates.
In this case, since we are looking for the 1-year forward rate starting one year from today (2f1), we need to find the expected spot rate for two years from today (S2) and the spot rate for one year from today (S1).
According to the yield curve provided, the spot rate for one year from today (S1) is 6.00%.
Now, to find the expected spot rate for two years from today (S2), we can use the formula:
S2 = S1 * (1 + 2f1)
Where S2 is the expected spot rate for two years from today, S1 is the spot rate for one year from today, and 2f1 is the 1-year forward rate starting one year from today.
Plugging in the values we have:
S2 = 6.00% * (1 + 2f1)
Now, let's solve for 2f1:
2f1 = (S2 / S1) - 1
Substituting the given values:
2f1 = (7.00% / 6.00%) - 1
Calculating it:
2f1 = 1.1667 - 1
2f1 = 0.1667
Rounding to two decimal places, the 1-year forward rate for the period beginning one year from today (2f1) is 0.17 or 17.00%.