Answer-first summary for fast verification
Answer: 5.00%
The 2-year forward swap rate starting in 3 years is calculated using the formula for the forward rate, which is given by \( 3F2 = \frac{(Rs \times 5 - R3 \times 3)}{(5 - 3)} \). In this formula, \( R3 \) represents the 3-year zero rate, and \( Rs \) represents the 5-year zero rate. According to the table provided in the file content, \( R3 = 2.50\% \) and \( Rs = 3.50\% \). Plugging these values into the formula yields: \( 3F2 = \frac{(3.50\% \times 5 - 2.50\% \times 3)}{(5 - 3)} = \frac{(17.5\% - 7.5\%)}{2} = \frac{10\%}{2} = 5\% \). Thus, the correct answer is C. 5.00%, which is the 2-year forward rate starting in year 3. The other options are incorrect for the following reasons: - Option A (3.50%) is incorrect because it is the zero rate for a 5-year investment, not the forward rate. - Option B (4.17%) is incorrect because it represents an annualized 3-year forward rate starting in 2 years, which is calculated using a misrepresented formula. - Option D (6.09%) is incorrect because it is the result of applying an incorrect formula to determine the 2-year forward rate starting in year 3.
Author: LeetQuiz Editorial Team
Ultimate access to all questions.
Understanding forward swap rates is crucial for managing interest rate risk. These rates allow investors to agree on interest payments that will occur in the future. Let's assume you need to determine the 2-year forward swap rate that will commence in 3 years based on the current yield curve and interest rate environment.
Which of the following options best approximates the 2-year forward swap rate starting 3 years from now?
A
3.50%
B
4.17%
C
5.00%
D
6.09%
No comments yet.