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The 1-year, 2-year, 3-year and 4-year zero rates are 2%, 3%, 4% and 5% per annum...

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Finance

The 1-year, 2-year, 3-year and 4-year zero rates are 2%,3%, 4% and 5% per annum (APR) with quarterlycompounding/payment.

a) What are the corresponding per annum zerorates with continuous compounding?

b) What is today’s forward rate for an investment initiated oneyear from today and maturing 3 years from today?  (Giveyour answer per annum with continuous compounding)?

c) What is today’s forward rate for a one-year investmentinitiated three years from today?  (Give your answer perannum with continuous compounding)?

Answer & Explanation Solved by verified expert
4.5 Ratings (662 Votes)
a Rate with continuous compounding Formula Continuous Compounding rate Times Compounding Takes place Log 1 rate Times Compounding Takes place 1 year rate 2 per annum quarterly compounding Here Times Compounding Takes place 12 3 4 Continuous Compounding rate 4 Log 1 2 4 4 Log    See Answer
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The 1-year, 2-year, 3-year and 4-year zero rates are 2%,3%, 4% and 5% per annum (APR) with quarterlycompounding/payment.a) What are the corresponding per annum zerorates with continuous compounding?b) What is today’s forward rate for an investment initiated oneyear from today and maturing 3 years from today?  (Giveyour answer per annum with continuous compounding)?c) What is today’s forward rate for a one-year investmentinitiated three years from today?  (Give your answer perannum with continuous compounding)?

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