Given Spot Rates for One-, Two-, and Three-Year Zero Coupon

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The Answer is Three forward rates can be calculated from the one-, two-, and three-year spot rates. The rate on a one-year loan that begins at the end of year 1 can be calculated using the one-and two-year spot rates; in the following equation one would solve for 1eb90b4_9353_1262_bccc_27607219afb6_TB86074_00

[ 1 + r ( 2 ) ] ^ { 2 } = [ 1 + r ( 1 ) ] ^ { 1 } [ 1 + f ( 1,1 ) ] ^ { 1 }

The rate on a one-year loan that starts at the end of year 2 can be calculated from the two-and three-year spot rates; in the following equation one would solve for 1eb90b4_9353_1264_bccc_5b256a0595e4_TB86074_00

[ 1 + r ( 3 ) ] ^ { 3 } = [ 1 + r ( 2 ) ] ^ { 2 } [ 1 + f ( 2,1 ) ] ^ { 1 }

Additionally, the rate on a two-year loan that begins at the end of year 1 can be computed from the one- and three-year spot rates; in the following equation one would solve for

f ( 1,2 ) :

[ 1 + r ( 3 ) ] ^ { 3 } = [ 1 + r ( 1 ) ] ^ { 1 } [ 1 + f ( 1,2 ) ] ^ { 2 }

Given Spot Rates for One-, Two-, and Three-Year Zero Coupon

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