Answer: 5.5%.

To calculate the 2y1y implied forward rate, we use the formula: \[(1 + Z_2)^2 \times (1 + \text{IFR}_{2,1}) = (1 + Z_3)^3\] Where: - \(Z_2\) is the 2-year spot rate (2.5%). - \(Z_3\) is the 3-year spot rate (3.5%). - \(\text{IFR}_{2,1}\) is the implied one-year forward rate two years from now. Plugging in the values: \[(1 + 0.025)^2 \times (1 + \text{IFR}_{2,1}) = (1 + 0.035)^3\] \[1.0506 \times (1 + \text{IFR}_{2,1}) = 1.1087\] \[1 + \text{IFR}_{2,1} = \frac{1.1087}{1.0506} = 1.0553\] \[\text{IFR}_{2,1} = 0.0553 \text{ or } 5.53\%\] Thus, the correct answer is **B (5.5%)**.

Author: LeetQuiz Editorial Team