Question: Using the table below reflecting risk-free zero interest rates over the next five years, calculate the value of an FRA (Forward rate Agreement) where you

Using the table below reflecting risk-free zero interest rates over the next five years, calculate the value of an FRA (Forward rate Agreement) where you will pay 4% (compounded annually) and receive LIBOR for the third year on $1 million. The forward LIBOR rate (compounded annually) for the third year is 4.5%.

Maturity (Years) Rate (% per annum)

1 2.0%

2 3.0%

3 3.5%

4 4.2%

5 4.5%

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