assume the zero-coupon bond from 1 year to 4 years are all available. and the current 1-year, 2-year 3-year. and 4-year spot rates are 4%, 5%, 6% and 7% accordingly. Interest rates are annually compounded. You want to lock in a 1-year interest rate beginning in 3 years. (ie. from year 3 to year4) by using some of the zero-coupon bonds above. Which zero-coupon would you use? and what is the locked-in 1-year rate beginning in 3 years?

• 1-year and 4-year zeros and the locked-in rate is 8.02%
• 2-year and 3-year zeros, and the locked-in rate is 8.03%
• 2-year and 4-year zeros, and the locked-in rate is 9.04%
• 3-year and 4-year zeros, and the locked-in rate is 10.06%

Explain with workings