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:

Midpoint Formula

A more precise way of calculating percentages using the value halfway between P1 and P2 for the base in calculating the percentage change in price and the value halfway between Q1 and Q2 as the base for calculating the percentage change in quantity demanded.

Price Elasticity

A measure of how much the quantity demanded of a good responds to a change in the price of that good, indicating how sensitive consumers are to price changes.

Hamburger

A popular fast food item consisting of a cooked patty of ground meat, typically beef, placed inside a sliced bun often accompanied with various condiments and toppings.

Slope

The measure of the steepness or inclination of a line or surface, typically expressed as a ratio.