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(Bonds and Forward Rates) Consider the zero rates (continuously-compounded) and cashflows for a risk-free bond...

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Finance

(Bonds and Forward Rates)

Consider the zero rates (continuously-compounded) and cashflows for a risk-free bond in Table 1 below:

Table 1: Term Structure of Interest Rates

Maturity (Years) Zero Rates Coupon Payments Principal

0.5 2.00% $10 -

1 2.30% $15 -

1.5 2.70% $10 -

2 3.20% $15 $1,000

(3 points) What is the no-arbitrage price of the bond?

(4.1)

(2 points) What is the continuously implied forward rate per year between year 1 and year 1.5?

(4.2)

(2 points) What is the implied forward rate between year 1 and year 2?

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