Assume That the Annual Interest Rate on 2-Period Loans Is

question 74

Essay

Assume that the annual interest rate on 2-period loans is 10% and the annual interest rate on 3-period loans is 12%.
a. What is the forward rate on loans made in period 2 and repaid in period 3?
b. What is the present value of a security with a cash flow of $300 at the end of period 1 and a cash flow of $400 at the end of period 3?
c. What is the future value (at the end of period 3) of the security in part b?

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