A One-Year STRIPS Sells at an Interest Rate of 3

question 11

Multiple Choice

A one-year STRIPS sells at an interest rate of 3.20% and a two-year STRIPS sells at an interest rate of 3.90%. What is the implied one-year forward rate? Assume the rates are effective annual rates.

• A)4.20%
• B)4.30%
• C)4.40%
• D)4.50%
• E)4.60%

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Definitions:

Statement of Comprehensive Income

A financial statement that shows all changes in equity during a period except those resulting from investments by and distributions to owners.

Balance Sheet

A financial statement that displays a company's assets, liabilities, and shareholders' equity at a specific point in time, providing a snapshot of its financial position.

Non-Cash Items

Expenses charged against revenues that do not directly affect cash flow, such as depreciation.

Generally Accepted Accounting Principles (GAAP)

A framework for a common set of principles, rules, and procedures of accounting.