Assume that the 1-year interest rate is 4% and the 2-year interest rate is 5%. You approach

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Assume that the 1-year interest rate is 4% and the 2-year interest rate is 5%. You approach a bank and ask at what rate the bank will promise to make a 1-year loan in 12 months' time. The bank offers to make a forward commitment to lend to you at 10%. Would you accept the offer? Can you think of a simple, cheaper alternative?

1-year interest rate....................4.00%

2-year interest rate....................5.00%

Forward rate ........................10.00%

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Fundamentals of Corporate Finance

ISBN: 978-0078034640

7th edition

Authors: Richard Brealey, Stewart Myers, Alan Marcus

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