CFA Practice Question

There are 147 practice questions for this study session.

CFA Practice Question

Given the spot rates r(1) = 6%, r(2) = 5.5%, and r(3) = 5%, we can calculate that f(2,1) is 4%. Without calculation we can determine that f(1,1) is:
A. between 4% and 5.5%.
B. between 5% and 6%.
C. between 4.5% and 5.5%.
Explanation: Since it is an downward-sloping yield curve, f(1,1) is smaller than r(2) which is 5.5%. The forward curve is downward-sloping so f(1,1) is greater than f(2,1) which is 4%.

User Contributed Comments 4

User Comment
zipphani2 Good question formulation..
LoCo83 Can someone explain why not C?

4% seems to me in the right direction, but seems drastically on the low side.
BradRoss 1.055^2/1.06 = 1.05 i got 5%
darbyland guys just trying picturing the spot rate curve and the forward rate curve in your mind.

Since the rates are downward-sloping, the forward rates will be placed below the spot rate curve.

In period 2, the f(1,1) has to be below 5.5% (=r(2)), but it has to be higher than f(2,1). Otherwise, the forward rate won't be a downward sloping
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