The following table shows yields to maturity of zero-coupon Treasury securities. P-639 Term to Maturity (years) Yield to Maturity (%)

1 3.50%

2 4.50 3 5.00 4 5.50 5 6.00 10 6.60

a. Calculate the forward 1-year rate of interest for year 3.

b. Describe the conditions under which the calculated forward rate would be an unbiased estimate of the 1-year spot rate of interest for that year.

c. Assume that a few months earlier, the forward 1-year rate of interest for that year had been significantly higher than it is now. What factors could account for the decline in the forward rate?