Part A:

The cash prices of six-month and one-year Treasury bills are $97 and $90. A 1.5-year bond that will pay coupons of $5 every six months currently sells for $92.

Calculate the six-month, one-year and 1.5-year zero rates.

Part B:

A company enters into an FRA that specifies it will receive a fixed rate of 4% on a principal of $400,000 between the end of year 1 and the end of year 2. Estimate the value of the FRA, knowing that forward rate for the period between year 1 and year 2 is 3% with annual compounding and the two year zero rate is 4.5%.