QUESTION ONE

INTEREST RATES AND YIELD CURVES

Given

14. 1-year par rate = 3.2%
15. 2-year par rate = 5.2%
16. 3-year par rate = 6.1%
17. 4-year par rate = 7.5%

Suppose the bond price and par values are both K1000,

1. Compute the 1-year, 2-year, 3-year and 4-year spot rates using bootstrapping

process.

2. Compute the 1-year forward rates, starting from today, 1 year from now, 2 years from now and 3-years from now.