- 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
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%
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. |