why are we taking the rate for year 1 as it is and calculating the forward rates for 2,3 and 4 ?
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pault co
2y ago#13.7% is the rate for the first year.
The rate of 4.25% is the overall/average rate per year for 2 years.
Since we know that it is 3.70% for the first year, it means that the rate for the second year (so as to end up with an overall average of 4.25%) must be 1.0425^2 / 1.037 - 1 = 0.048 or 4.80%
It is the same logic for the 3rd and 4th years.
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