Answer: 5.00%

## Explanation The 2-year forward rate starting in 3 years is calculated using the formula: $$_3F_2 = \frac{R_5 \times 5 - R_3 \times 3}{5 - 3}$$ Where: - $R_3$ = 3-year zero rate = 2.50% - $R_5$ = 5-year zero rate = 3.50% Substituting the values: $$_3F_2 = \frac{3.50\% \times 5 - 2.50\% \times 3}{2} = \frac{17.50\% - 7.50\%}{2} = \frac{10.00\%}{2} = 5.00\%$$ This calculation is based on the principle that the total return from investing for 5 years at the 5-year zero rate should equal the return from investing for 3 years at the 3-year zero rate and then for 2 years at the forward rate starting in year 3. The formula ensures that there are no arbitrage opportunities between investing directly for the longer period versus investing for shorter periods and rolling over at forward rates.

Author: LeetQuiz .