Given the spot and forward rates r(1) = 5%, f(1,1) = 5.5%, and f(2,1) = 6%, calculate r(2).

A. 5.15%
B. 5.25%
C. 5.35%

Correct Answer: B

[1 + r(2)]² = [1 + r(1)] [1 + f(1,1)]

[1 + r(2)]² = 1.05 x 1.055

r(2) = 5.25%