Suppose a lender enters into an FRA, where the lender will receive 12%, measured with annual compounding, for the fourth year and pay LIBOR on a principal of $10,000. The forward LIBOR rate (annually compounded) for the fourth year is 12.5%, suppose that risk-free zero interest rates with continuous compounding are as follows:

Maturity( years) Rate( % per annum)

1 2

2 3

3 4

4 6

5 7

What is the forward rate for the 4^th year? (sample answer: 2.50%)

What is the cash flow to the lender at the end of the term (at T=4)? (sample answer: $25.50 or -$25.50)

What is the Value of the FRA to the lender (at T=0)? (sample answer: $25.50 or -$25.50)