The two-year zero rate is 6% and the three year zero rate is 6.5%. What is the forward rate for the third year? All rates are continuously compounded
A. 6.75%
B. 7.0%
C. 7.25%
D. 7.5%
D
The forward rate for the third year is (3×0.065?2×0.06)/(3?2) = 0.075 or 7.5%.
Business
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