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QUESTION ONE INTEREST RATES AND YIELD CURVES Given 1-year par rate = 3.2% 2-year par rate = 5.2% 3-year par rate = 6.1% 4-year par

QUESTION ONE

INTEREST RATES AND YIELD CURVES

Given

  1. 1-year par rate = 3.2%
  2. 2-year par rate = 5.2%
  3. 3-year par rate = 6.1%
  4. 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.

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

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