If the Spot Interest Rate on a Prime-Rated One-Month CD

question 108

Multiple Choice

If the spot interest rate on a prime-rated one-month CD is 6 percent today and the market rate on a two-month maturity prime-rated CD is 7 percent today, the implied forward rate on a one-month CD to be delivered one month from today is

• A)9 percent.
• B)11 percent.
• C)18 percent.
• D)10 percent.
• E)8 percent.

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Definitions:

Interest Rate

The rate of a loan designated as interest to the borrower, typically represented as an annual percentage of the loan's unpaid balance.

Present Discounted Value

The value of a future amount of money in today's terms, calculated by applying a discount rate to account for time and risk.

Payments For Capital

Funds disbursed to acquire or maintain fixed assets, like equipment or buildings, or to compensate the providers of financial capital.

Interest

The charge for borrowing money, typically expressed as an annual percentage of the principal.