CAS Exam 9 Spring 2016, Question 11
Study guide: Exam 9
Company X entered into a forward rate agreement in which it will lend $100,000 at 4% to company Y from January 1, 2017 to January 1, 2018. The value of this agreement at January 1, 2016 is $193.12.
Assume:
- The one-year spot rate at January 1, 2016 is 3.5%.
- The one-year forward rate from January 1, 2018 to January 1, 2019 is 4.1%.
- Annual compounding.
Part a (1.25 points)
Draw the three-year, implied yield curve on January 1, 2016. Label all axes and data points.
Part b (0.75 points)
Briefly describe the implied yield curve using the three main theories for the term structure of interest rates.
No current syllabus covers this question; it is kept for the record.
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