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(a) The S&P/ASX200 price index opened the calendar year at 6,690 and was at 5,897 by the end of the June. The S&P/ASX Small Ordinariesindex went from 2,900 to 2,599over the same period. What is the effective annual rate of return on each of these indices? Explain the difference in information provided by these two indices.

(b) Using the approachcovered in your textbookcalculate the annual forward rates of return outtofive years given the following annualspot rates, one year (0z1= 0.89%pa), two year (0z2= 0.82%pa), three year (0z3= 0.74%pa), four year (0z4= 0.64%pa), five year (0z5= 0.52%pa). What doesthis imply about future interest rates? TIP: you might findequations 3.13 and 4.11 to be useful starting points.

(Rates as a percentages accurate to one basis point)