Question

You observe the following term structure of interest rates (zero-coupon yields, also called "spot rates"). The spot rates are annual rates that are semi-annually compounded.

Time to Maturity	Spot Rate
0.5	2.00%
1.0	3.00%
1.5	3.50%
2.0	3.00%
2.5	4.00%
3.0	4.50%

1.  Compute the six-month forward curve, i.e. compute f(0,0.5,1.0), f(0,1.0,1.5), f(0,1.5,2.0), f(0,2.0,2.5), and f(0,2.5,3.0). Round to six digits after the decimal. Enter percentages in decimal form, i.e. enter 2.1234% as 0.021234.

In all the following questions, enter percentages in decimal form, i.e. enter 2.1234% as 0.021234. Assume semi-annual compounding.

2.  Compute the one-year forward rate in six months, i.e. compute f(0,0.5,1.5)

3.  Compute the one-year forward rate in one year, i.e. compute f(0,1.0,2.0)

4.  Compute the one-year forward rate in two years, i.e. compute f(0,2.0,3.0)

5.  Compute the 1.5-year forward rate in six months, i.e. compute f(0,0.5,2.0)

6. Compute the 1.5-year forward rate in one-year, i.e. compute f(0,1.0,2.5)

7.  Compute the 1.5-year forward rate in 1.5-years, i.e. compute f(0,1.5,3.0)

8.  Compute the two-year forward rate in six-months, i.e. compute f(0,0.5,2.5)

9.  Compute the two-year forward rate in one-year, i.e. compute f(0,1.0,3.0)

10.  Compute the 2.5-year forward rate in six-months, i.e. compute f(0,0.5,3.0)

Answer 1