Question: Note: The bonds have a $100 face value. The interest rates are annual interest rates with semi-annual compounding and the coupon rates are also annual

Note: The bonds have a $100 face value. The interest rates are annual interest rates with semi-annual compounding and the coupon rates are also annual rates which are paid semi-annually.

Question: The forward rates are specified for the next two years: r(0.5)=5%, r(1)=6%, r(1.5)=7%, r(2)=8%. A 6% coupon bond that is maturing 2.5 years from now has a price of $102 right now. Moreover, a 5% coupon bond is maturing 3 years from now and has a price of $98 right now.

Part a) What is the 2.5 year forward rate r(2.5)?

Part b) What is the 3 year forward rate r(3)?

I would appreciate it if someone could explain and solve questions like these. Thank you!

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