Question: Suppose that zero interest rates with continuous compounding are as follows: Maturity (years) Rate (% per annum) 1 3.0 2 4.0 3 4.5 4 4.75

Suppose that zero interest rates with continuous compounding are as follows:

Maturity (years)

Rate (% per annum)

1

3.0

2

4.0

3

4.5

4

4.75

5

5.0

a. What are the forward interest rates for the second, third, fourth, and fifth year?

b. What is the value of an FRA where you will pay 6% (compounded annually) on a principal of $1 million for the fourth year?

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