- CFA Exams
- CFA Level I Exam
- Study Session 14. Fixed Income (1)
- Reading 44. Introduction to Fixed-Income Valuation
- Subject 7. The Maturity Structure of Interest Rates

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**CFA Practice Question**

The six-month Treasury bill spot rate is 4.0%, and the one-year Treasury bill spot rate is 5.0%. The implied six-month forward rate six months from now is (semi-annual compounding) ______.

A. 3.0%

B. 4.5%

C. 6.0%

**Explanation:**[(1 + 0.05/2)

^{2}/(1 + 0.04/2)] - 1 = 3%. 3% x 2 = 6%

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**User Contributed Comments**
8

User |
Comment |
---|---|

shasha |
strictly say, 1f1 is A, 3.0%. 6% is the ANNUALIZED 1f1. |

guna |
1f1=(((1.05)**2)/ (1.04))-1 |

Millanna |
1f1 = ((1+5%/2)^2)/(1+4%/2)-1=3% 3%*2 to annualize |

miropower |
approximation could imply = (2*1y*5%/2)-(2*1/2y*4%/2) = 3 then annualize *2 = 6 |

CJPerugini |
Spot rates are always quoted on an annualized basis, even if it is for a 6 month spot rate. |

CJPerugini |
Forwards rates as well. |

stanziolap |
Why squared for (1+5%/2) |

todolist |
@stanziolap: because 5.0% is annual rate but you want semi-annual compounding, so you divide it by 2 then, add 1 and square it. |