Smith Pays $950 for an Investment That Returns $500 at the End

Multiple Choice

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?

A) Less than 7.0%
B) 7.0% but less than 7.7%
C) 7.7% but less than 8.4%
D) 8.4% but less than 9.1%
E) 9.1% or more