Question

Calculate the value of x (the implied forward rate on one-year maturity Treasuries to be delivered in one year). A. 6.53 percent. B. 10.83 percent. C. 5.75 percent. D. 6.925 percent. E. 1.017 percent.

Answer 1

Answer:

The value of X is A. 6.53 percent.

The value of Y is B. 10.83 percent

Explanation:

Note: See the full question as attached as picture below

Spot 1 Year                  Spot 2 Year      Forward 1 Year (1-year maturity)

Treasury                            3.0%                         4..75%                  x

BBB Corporate Debt         7.5%                         9.15%                  y

The formula to calculate the forward rate is: F1.1 = [(1+S2)² / (1+S1)] - 1

For treasury

F1.1 = [(1+4.75%)² / (1+3.0%)] - 1

F1.1 = 1.09725625 / 1.03 - 1

F1.1 = 6.53%

For BBB Corporate Debt

F1.1 = [(1+9.15%)² / (1+7.5%)] - 1

F1.1 = 1.19137225 / 1.075 - 1

F1.1 = 10.83%