15. Continue to use the data in the preceding problem. 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. How many 5-year maturity zeros would you have to sell to make your initial cash flow equal to zero?

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 interest rate equals (1  f 4 )  (1  f 5 )  1. You therefore can interpret the 2-year loan rate as a 2-year forward rate for the last 2 years. Alternatively, show that the effective 2-year forward rate equals

( )

( )

1 1

5 1 5

3 3







y