Given the spot rates r(1) = 5%, r(2) = 5.5%, and r(3) = 6%, we can calculate that f(2,1) is 7%. Without calculation we can determine that f(1,1) is

A. between 5.5% and 7%.
B. between 6% and 7%.
C. greater than the average of 6% and 7%, which is 6.5%.

Correct Answer: A

Since it is an upward-sloping yield curve, f(1,1) is greater than r(2) which is 5.5%.

The forward curve is upward-sloping so f(1,1) is smaller than f(2,1) which is 7%.