2. Spot rates and forward rates (30 points): Assume that the current yield curve for zero-coupon bonds (spot rates) is as follows: y = 0.4%, y2 = 1%, y3 = = 1.5%. a. What are the implied 1-year forward rates f2 and fz? Assume that there is no uncertainty about future short rates, i.e. that future short rates (future 1 year yields) will be equal to current forward rates (so future short term interest rates will be equal to f2 and f;). b. In that situation what will be the spot curve (that is, the yields to maturity on 1- and 2-year zero coupon bonds) in 1 year? c. What is today's price of a 3-year zero coupon bond with par value of 1000? - And IF y3 change to 2% because of recovery d. What is the price of this bond next year (remember, it is then a 2 year zero coupon bond)? What is the rate of return on this bond over the next year? - And how does rise of interest y3 change to 2% affect your expectations and returns