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Enrolled Actuary Exam Prep

Category - Enrolled Actuary

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Smith pays $950 for an investment that returns $500 at the end of year 3, and $700 at the end of year 4. The price is based on a 2-year spot rate of 5.0% and a 4-year spot rate of 7.0%. X = the year 3 forward rate (i.e., the 2-year deferred, 1-year spot rate).In what range is X?

Less than 7.0%
7.0% but less than 7.7%
7.7% but less than 8.4%
8.4% but less than 9.1%
9.1% or more

Explanation

Answer: D - 8.4% but less than 9.1%

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