1-Year Forward Rate Calculation

C

To calculate the 1-year forward rate one year from now, we can use the formula for calculating forward rates based on spot rates. The formula is as follows:

(1 + s2)^2 = (1 + s1) * (1 + f12)

Where: s1 = spot rate for 1 year (current 1-year Treasury bill yield) s2 = spot rate for 2 years (current 2-year Treasury security yield) f12 = 1-year forward rate one year from now

In this case, we are given: s1 = 4.10% = 0.0410 s2 = 4.65% = 0.0465

Let's substitute these values into the formula and solve for f12:

(1 + 0.0465)^2 = (1 + 0.0410) * (1 + f12)

Simplifying the equation:

(1.0465)^2 = 1.041 * (1 + f12)

1.09425225 = 1.041 + 1.041 * f12

Subtracting 1.041 from both sides:

0.05325225 = 1.041 * f12

Now, divide both sides by 1.041:

0.05325225 / 1.041 = f12

f12 ≈ 0.0511796

To express the answer as a percentage, we multiply by 100:

f12 ≈ 5.12%

Therefore, the 1-year forward rate one year from now is closest to 5.12%.

None of the provided answer options are exactly equal to 5.12%. The closest answer option is C. 5.20%, but it is still not an exact match.