The following table shows yields to maturity of zero-coupon Treasury securities.

Term to Maturity (Years) Yield to Maturity (%)

1 ..................3.50%

2 ..................4.50

3 ..................5.00

4 ..................5.50

5 ..................6.00

10 ..................6.60

a. Calculate the forward 1-year rate of interest for year 3.

b. Describe the conditions under which the calculated forward rate would be an unbiased estimate of the 1-year spot rate of interest for that year.

c. Assume that a few months earlier, the forward 1-year rate of interest for that year had been significantly higher than it is now. What factors could account for the decline in the forward rate?