Question 2 (8 marks)

A T-bill quote sheet has 98-day T-bill (Face value: $10,000) quotes with a 3.86% bid and a 3.83% ask rates.

1. (a) Calculate purchase price of the bill.

2. (b) Calculate the corresponding bond equivalent yield.

3. (c) Prices of zero-coupon bonds reveal the following pattern of interest rates:

(2 marks) (2 marks)

Years from now	1-year interest rate
0	5.2%
1	7.3%
2	8.6%

Calculate: i) 2-year interest rate on today and 3-year interest rate on today.

ii) 1-year forward rate 3 years from now if 4-year interest rate on today is 7.8%.