Multiple choice

1. If the 4-year spot rate is 7% and the 3-year spot rate is 6%, what is the one-year forward rate of interest three years from now?  

a. 10.0% 

b. 6.5% 

c. 9.6% 

d. None of the above 

2. How can one invest today at the 2-year forward rate of interest? I) By buying a 2-year bond and selling a 1-year bond with the same coupon II) By buying a 1-year bond and selling a 2-year bond with the same coupon III) By buying a 1-year bond and then after a year reinvesting in a further 1-year bond  

a. I only 

b. II only 

c. III only 

d. II and III only 

3. The expectations hypothesis states that the forward interest rate is the: I) Expected future spot rate II) Always greater than the spot rate III) yield to maturity  

a. I only 

b. II only 

c. III only 

d. II and III only 

4. If the nominal interest rate per year is 10% and the inflation rate is 4%, what is the real rate of interest?  

a. 10% 

b. 4% 

c. 5.8% 

d. None of the above