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The one-year interest rate is 6,5% p.a. and the six-month interest rate is 6% p.a. What is the forward six-month interest rate for the period...

The one-year interest rate is 6,5% p.a. and the six-month interest rate is 6% p.a. What is the forward six-month interest rate for the period between six months and one year from now? Proof whether this forward interest rate can be taken to be the interest rate expected by money market participants?

Answers

Jim
solution;

Let x be the forward interest rate p.a. (so that the rate for six months is x/2).
(1,03)(1 +x/2) =1,065
1 +x/2 =(1,065)/(1,03)
x/2 =[(1,065)/(1,03)] -1
x=2{ [(1,065)/(1,03)] -1}
Therefore x=0,068, i.e. 6,8% p.a
jim items answered the question on November 13, 2018 at 17:55

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