Purchase Solution

# Spot Rates

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Given the following forward rates, calculate the one,two,three and four year spot rates:

Forward time period ----- Forward rate
f0,1 ------- 10.0%
f1,2 ------- 9.5%
f2,3 ------- 9.0%
f3,4 ------- 8.5%

##### Solution Summary

This solution calculated the spot rates given the forward rates.

##### Solution Preview

See Word attachment for solution.

The one year spot rate is the same as the forward rate from year 0 to 1 = 10.0%.
The two year spot rate = [1.1 * 1.095] ^ (1/2) - 1 = 1.097 - 1 = 0.0975 = 9.75%.
The three year spot rate = [1.1 * 1.095 ...

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