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Unformatted text preview: 1.15563/1.06500 = 1.08509 = 1 + period 2 return 1.085091 = 8.51% = Answer 1 year forward, starting one year from today 8% 1 year forward, starting two years from today? 1 year forward, starting one year from today ? 1 year forward, starting two years from today? Calculate Spot Rates From Forward Rates Year 1 Year 2 Year 3 1 year spot 5% 1. Calculate the two year spot rate (1+.05)x(1+.065) = $1.11825 = FV of $1 in two years (1.11825)^.5 = 1.05747 = 2 year spot + 1 1.05747  1 = 5.75% = Answer 2. Calculate the three year spot rate (1+.05)x(1+.065)x((1+.08) = $1.20771 = FV of $1 in three years (1.20771)^.3333333 = 1.06493 = 3 year spot + 1 1.06493  1 = 6.49% = Answer 1 year forward, starting one year from today 6.5% 1 year forward, starting two years from today 8%...
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 Spring '08
 DUDLEY
 Debt

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