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Continue to use the data in the preceding problem Suppose

Continue to use the data in the preceding problem. Suppose that you want to construct a two- year-maturity forward loan commencing in three years.

a. Suppose that you buy today one three- year- maturity zero- coupon bond. How many five- year-maturity zeros would you have to sell to make your initial cash flow equal to zero?

b. What are the cash flows on this strategy in each year?

c. What is the effective two- year interest rate on the effective three- year- ahead forward loan?

d. Confirm that the effective two- year interest rate equals (1 + f4) × (1 + f5) - 1. You therefore can interpret the two- year loan rate as a two- year forward rate for the last two years. Alternatively, show that the effective two- year forward rate equals

(1+y5)5 / (1+y3)3 – 1

a. Suppose that you buy today one three- year- maturity zero- coupon bond. How many five- year-maturity zeros would you have to sell to make your initial cash flow equal to zero?

b. What are the cash flows on this strategy in each year?

c. What is the effective two- year interest rate on the effective three- year- ahead forward loan?

d. Confirm that the effective two- year interest rate equals (1 + f4) × (1 + f5) - 1. You therefore can interpret the two- year loan rate as a two- year forward rate for the last two years. Alternatively, show that the effective two- year forward rate equals

(1+y5)5 / (1+y3)3 – 1

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