The Following Is Information on Current Spot and Forward Term

question 14

Multiple Choice

The following is information on current spot and forward term structures (assume the corporate debt pays interest annually) : $$\begin{array} { | l | l | l | c | } \hline & \text { Spot 1 Year } & \text { Spot 2 Year } & \begin{array} { l } \text { (1-year maturity) } \\\text { Forward 1-year }\end{array} \\\hline \text { Treasury } & 3.0 \text { percent } & 4.75 \text { percent } & \mathrm { X } \\\hline \text { BBB Corporate Debt } & 7.5 \text { percent } & 9.15 \text { percent } & \mathrm { Y } \\\hline\end{array}$$
-Calculate the value of x (the implied forward rate on one-year maturity Treasuries to be delivered in one year) .

• A)6.53 percent.
• B)10.83 percent.
• C)5.75 percent.
• D)6.925 percent.
• E)1.017 percent.

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Definitions:

Repudiated

Refused to accept or be associated with; to reject a proposal, idea, or relationship, often legally or formally.

Noncompete Agreement

A legal contract preventing one party from entering into or starting a similar profession or trade in competition against another party.

Bargained-For Exchange

In reference to agreements, when a promise is made in exchange for another promise, in exchange for an act, or in exchange for a forbearance to act.

Contracts For Necessaries

Legal agreements for the supply of essential goods or services, such as food, shelter, and clothing, especially pertinent to persons unable to enter into contracts, like minors.