#1. The following table depicts current market conditions (assume annual compounding): Year Current spot rates (n) Implied 2-year forward rate (Izz) 3 2.40% 2.60% 2.70% 2.905% NIA 4.00% NIA (a) Calculate implied 2-year forward rate. (1 + 0. 027)5 (1 + 0.024) -1 = 0. 0315 or 3. 15% 124 = (1 + 0. 029)6 (1+ 0.026)" -1 = 0. 0350 or 3.50% /zs = (1 + 0. 040)7 (1 + 0. 027)5 -1 = 0. 0732 or 7.32% (b) According to your analysis on the market condition, propose two strategies mine only zero coupon bonds in order to take advantage of shifts in yield curve. The 2-year forward rates implies that 7-year zero coupon bonds are rich and 5-year zero coupon bonds are relatively cheap. Thus, we build a strategy as below: 1. Simple strategy: 5-year zero coupon bonds. 2. Duration neutral barbell: 3- and 7-year zero coupon bonds