Consider the following rates: 

10-year zero rate r(0, 10) = 8% and forward rate r(0; 5, 10) = 10%. 

(i) Find the 5-year zero rate r(0,5) if there is no arbitrage. 

(ii) If at the end of the 5th-year, the value of your money is $100K find: 

(a) Its present value.

 (b) Value at the end of 10th year. Use monthly discrete compounding. (Use of financial formulas in financial calculators is not allowed and no credit will be given when used.)

Answer rating: 100% (QA)

To find the 5year zero rate r05 we can use the following formula r0 5 1 r0 1010 1 r0 5515 1 Where r0 ... View the full answer