Quiz Review - Question 107
Question ID#: 148031
Reference Tables Z-TableT-TableF-Table 5%F-Table 2.5%Chi-TableAcronyms
Your answer: A was incorrect. The correct answer was B)
In the book they have a different set up where they dont use the square root. When should I use the square root, third root, etc and when do I just divide by the spot rates and subtract one?
The forward rate you’re trying to calculate is (please forgive the lack of subscripts) 2f1: the 2-period forward rate starting 1 period from today. Because it’s a 2-period rate, the division – (1 + z3) / (1 + z1) – gives you the growth factor for two periods; you need to take the square root to get the growth factor for one period, then subtract 1 to get the interest rate for one period.
If you were computing, say, 4f3, then the division would be (1 + z7) / (1 + z3), and that would be a 4-period growth factor; you’d take the fourth root, then subtract 1 to get a 1-period interest rate.
Ohh i see. Thank you S2000magician
You’re welcome.