a) Explain the difference between future and forward contracts.

b) How do swaps work and what are the advantages of entering into a swap?

c) Suppose you observe the following three bonds. Assume that all bonds are denominated at $100 face value per contract and that they pay their coupons annually.

Price Coupon Maturity (years)

Bond A 111.42 15 3

Bond B 108.33 15 2

Bond C 116.61 15 1

i) Compute the spot rates r0,1, r0,2 and r0,3.

ii) Compute the forward rates r1,2 and r2,3.