Answer: 7.0000%

For continuous compounding, the relationship between spot rates and forward rates is: e^(r₂ × 2) = e^(r₁ × 1) × e^(f₁,₂ × 1) Where: - r₁ = 5% = 0.05 (1-year spot rate) - r₂ = 6% = 0.06 (2-year spot rate) - f₁,₂ = forward rate from year 1 to year 2 **Calculation:** e^(0.06 × 2) = e^(0.05 × 1) × e^(f₁,₂ × 1) e^0.12 = e^0.05 × e^(f₁,₂) e^0.12 = e^(0.05 + f₁,₂) Taking natural logarithms: 0.12 = 0.05 + f₁,₂ f₁,₂ = 0.12 - 0.05 = 0.07 = 7.0000% The forward rate from the end of the first year to the second year is exactly 7.0000%.

Author: LeetQuiz Editorial Team