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Unformatted text preview: = 12.469% . 0623 . 1 ) 04135 . 1 ( ) 04295 1 ( 1 ) 1 ( ) 1 ( 12 13 12 13 12 =-+ + =-+ + = y y f Problem 5-22 Bart has two choices: With choice 1, Bart will realize the two-year spot rate and that rate is known with certainty. With choice 2, Bart will realize the one-year spot rate, but the one-year rate one year from now is unknown. The one-year forward rate is the rate that will make the two choices equal. If Bart expects that one year from now, the one year spot rate will be higher than the forward rate, then he will choose choice 2. It is not just enough to believe that one year rates will be higher in the second year than in the first year....
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- Spring '10