Given the observed yields below, what is the 1-year forward rate, 4 years from now?

[Hint: This is the 1-year return that will take you from the 4-year average annualized return (yield) to the 5-year average annualized return)

• 4-year yield = 3.5%
• 5-year yield = 4.0%

Forward rate (semi-annual) = [(1 + longer maturity rate/2)^# of periods/ (1 + shorter maturity rate/2)^(# of periods)] - 1

Answer rating: 100% (QA)

Observed Yields 4year yield 35 5year yield 40 Formula Forward rate semiannual 1 longer maturity ... View the full answer