Suppose that you want to construct a 2-year maturity forward loan commencing in 3 years.

a. Suppose that you buy today one 3-year maturity zero-coupon bond with face value $1,000.

How many 5-year maturity zeros would you have to sell to make your initial cash flow equal to zero (specifically, what must be the total face value of those 5-year zeros)?

b. What are the cash flows on this strategy in each year?

c. What is the effective 2-year interest rate on the effective 3-year-ahead forward loan?

d. Confirm that the effective 2-year forward interest rate equals (1 + f4) × (1 + f5) −