2. ($$$)

Today, you are given the yield curve for par bonds (1). The annualized yield (with annual compounding) on a one year par bond is 10%, annualized yield (with annual compounding) on a two year par bond is 15%, the annualized yield (with annual compounding) on a three year par bond is 20%, and the annualized yield (with annual compounding) on a four year par bond is 25%.

What is the implicit forward rate (with continuous compounding) on a one year loan where the loan begins in one year and is repaid in full in two years from today (i.e., calculate 0r1,2)?

NOTE: (1) A par bond is a constant coupon bond which has a current market value equal to the face (or par) value of the bond. The yield curve indicates the coupon yield that must be provided in order for such a constant coupon bond to sell for par. A constant coupon bond provides annual coupon payments of equal dollar amount. At maturity the constant coupon bond pays the usual annual coupon payment plus the face value of the bond.

Maturity (in years) 0.75 1.00 1.25 1.75 2.00 2.25 6.0834% 6.1875% 6.6705% 7.0262% 7.1531% 7.4853% Maturity (in years) 0.75 1.00 1.25 1.75 2.00 2.25 6.0834% 6.1875% 6.6705% 7.0262% 7.1531% 7.4853%