Answer:
13.90%
Explanation:
Mathematically, the relationship between the different interest rates using the equation is shown below:
(1+S3)^3=(1+S2)^2*(1+2y1y)
The spot rate in year 3 is the same as the spot rate in year 2 multiplied by the 1-year forward rate beginning 2 years.
S3=3-year rate =7.2%
S2=2-year rate =4%
2y1y=one-year interest rate 2 years from now=the unknown
(1+7.2%)^3=(1+4%)^2*(1+2y1y)
(1+2y1y) =(1+7.2%)^3/ (1+4%)^2
2y1y=(((1+7.2%)^3/ (1+4%)^2)-1
2y1y= 1.138984142 -1
2y1y= 13.90%
