Forward Rate.

a$.$ Assume that, as of today, the

annualized two$-$year interest rate is

$12\mathrm{.}5$ percent and the one$-$year interest

rate is $10\mathrm{.}5$ percent. Use this

information to estimate the one$-$year

forwardlate.

b$.$ Assume that the liquidity premium on

a two$-$year security is $0\mathrm{.}45$ percent. Use

this information to estimate the one$-$

year forward rate.