FRM Part I · FRM Exam Part I · Interest Rates
A 1-year zero-coupon bond with a face value of 100 trades at 96, and a 2-year zero-coupon bond with a face value of 100 trades at 92. What is the 1-year forward rate starting in one year, with annual compounding?
The forward rate is about 4.35%. Investing for one year at the 96 price and then reinvesting must match the 2-year zero at 92, so the forward growth factor is 96/92 = 1.04348. The 4.17% figure is merely the one-year spot rate.
- A4.35%Correct
- B4.17%
- C4.00%
- D8.70%
Explanation
The forward rate is the ratio of the two zero prices minus one: 96/92 − 1 = 4.348%, or about 4.35%. The 4.17% option is the 1-year spot rate (100/96 − 1), not the forward rate. The 8.70% option is 8/92, the 2-year discount over the whole period, which is not a one-year forward rate.
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