Use this information to answer the two questions below. You observe the following yields on zero coupon bonds. All are annual rates based on semiannual compounding. 1 Year Maturity 4% 2 Year Maturity 5% 3 Year Maturity 4.5% 4 Year Maturity 4.75% Q1: The 1 year forward rate between years 2 and 3 is:

Negative

Positive and between 4.5% and 5%.

Positive and above 5%.

Positive and below 4.5%.

Q2: Use the forward rate calculator in Excel to answer this question. What is the 3 year forward rate between years 1 and 4 in this example?

5.5028%

5.0006%

7.0166%