My apologies for seeming to spam the forum with questions. Right now I’m having trouble with solving questions from LOS 52.h; conceptually I think I understand what Im supposed to be doing here but mathematically I cant seem to connect the dots.
You have 2 choices: invest full a full n years at some rate x% or invest for a shorter period at y% and reinvest the accumulated amount at the then current rate for the remaining time to get you to time n. The ending amount at time n should be equal.
Always remember this…
A THREE year spot rate is = a TWO year spot rate _ TIMES _ a 1 year forward rate in two years.
Probably works better with an actual example:
Assume: Spot3 = 3.5% Spot2 = 3.1% 1 year forward in 2 years = X
Works out like this:
They could also ask you to calculate a spot rate instead:
Spot3 = 3.5% Spot2 = ?? 1 Y Forw. in 2 yrs = 4.3%
Hope this helps. But as long as you use this same format, you can answer any question they’ll ask you on exam day
You are so sweet CEO10K. And I’m straight.
And his penmanship is exquisite!!!