You are given the following spot rates:

Maturity (Year)	Spot Rate (%)
1	2.9%
2	3.2%
3	3.6%
4	4.2%

Compute the forward rate between years 1 and 3.

• 3.15%
• 3.25%
• 3.5%
• 3.75%
• 3.95%

References

Lo, Andrew W.; Wang, Jiang. "MIT Sloan Finance Problems and Solutions Collection Finance Theory I" (PDF). alo.mit.edu. Retrieved November 30, 2023.

Solution: E

[[math]]\left(1+r_3\right)^3=\left(1+r_1\right)^1\left(1+f_{1,3}\right)^2 \rightarrow f_{1,3}=3.95 \%[[/math]]

References

Lo, Andrew W.; Wang, Jiang. "MIT Sloan Finance Problems and Solutions Collection Finance Theory I" (PDF). alo.mit.edu. Retrieved November 30, 2023.