- 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

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**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%.

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**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 |