Question: 1. Given Par rates p(1) = 2.5%, p(2) = 2.99%, p(3) = 3.48% and Spot Rates r(1) = 2.5%, r(2) = 3%, r(3) = ?

1. Given Par rates p(1) = 2.5%, p(2) = 2.99%, p(3) = 3.48% and Spot Rates r(1) = 2.5%, r(2) = 3%, r(3) = ?

a. The 3 year spot rate = 2.56%

b. The 3 year spot rate = 3.60%

c. The 3 year spot rate = 3.50%

d. The 3 year spot rate = 3.65%

Can someone give me a detailed explanation as to why the answer is 3.50%? Is there a formula to solve this?

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