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%).