Question: 5. Suppose that risk-free zero interest rates with continuous compounding are as follows: Rate (% per annum) 2.0 3.0 3.7 4.2 4.5 Maturity(years) 1 2

5. Suppose that risk-free zero interest rates with continuous compounding are as follows: Rate (% per annum) 2.0 3.0 3.7 4.2 4.5 Maturity(years) 1 2 3 4 5 Calculate forward interest rates for the second, third, fourth, and fifth years. Solution: The forward rates with continuous compounding are as follows: Year 2: 4.0% Year 3: 5.1% Year 4: 5.7% Year 5: 5.7%

Suppose that risk-free zero interest rates with contimuous compounding are as follows: Calculate forward interest rates for the second, third, fourth, and fifth years. Solution: The forward rates with continuous compounding are as follows: Year 2: 4.0% Year 3: 5.1% Year 4:5.7% Year 5: 5.7%

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