- CFA Exams
- CFA Level I Exam
- Study Session 12. Fixed Income (1)
- Reading 32. The Term Structure and Interest Rate Dynamics
- Subject 1. The Forward Rate Model
CFA Practice Question
Given the spot rates r(1) = 5%, f(1,1) = 5.5%, and f(2,1) = 6%, calculate r(3).
A. 5.25%
B. 5.5%
C. 5.7%
Explanation: [1 + r(3)]3 = [1 + r(1)] [1 + f(1,1)][1 + f(2,1)]
[1 + r(3)]3 = 1.05 x 1.055 x 1.06
r(3) = 5.5%
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