RB_CH03_Q016. Five-year rate 10% ten-year rate 15% forward
difficulty ·answer type: expression·✓Not solved
Problem
The five-year interest rate is 10%, and the 10-year interest rate is 15%. You conclude that the forward rate from year 5 to year 10 is approximately 20%. Explain, using plain English, why the forward rate has to be higher than the 20% approximate value mentioned above.
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