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Part III.

Assume you are treasury manager in a company and the company needs

$1,000,000($1Million)in6monthsandneedsitfor1year.Toreduceyour interest rate risk, you can finance this need by buying a 6-months zero- coupon bonds with a face value $1 Million and simultaneously selling certain amount of 1.5-years zero-coupon bond to finance thepurchase.

Alternatively, you can go to bank to organize a forward contract, i.e., you can ask bank to give you a quote if you want to borrow $1 Million in 6 months and need borrow it for 1 year. Assume the bank gives you a quote 10% per annum semi-annual compounding.

BasedontheknowledgethatyouhaveacquiredfromPartIandPartII,will youacceptbank's quote? What is the reasoning behind yourdecision?