Question: 1. [10 points] STC is planning to implement an aggressive growth strategy in US market. It plans to start a project after 2 years from

  1. 1. [10 points] STC is planning to implement an aggressive growth strategy in US market. It plans to start a project after 2 years from today, but it is concerned that interest rates will increase when it launches the project and obtains the necessary funding from the debt market. The company plans to pay back the loan 2 years after it receives the loan. STC observes the following zero rates, at which it can both borrow or invest.
    1. Calculate the 1224, 2436, and 3648 forward rates for the following continuously compounded rates

Year

Zero Rate

1

4.46%

2

4.93%

3

5.50%

4

5.78%

  1. What is your advice to STC regarding its concern about rising interest rates in the future? What are the necessary steps it needs to take today to lock in the borrowing cost of its project in the future? What will be its borrowing cost?

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