Suppose that zero interest rates with continuous compounding are as follows:

Maturity (years)	Rate (% per annum)
1	1.5
2	1.8
3	2.0
4	2.6
5	3.1

a) Calculate the forward interest rates for the 2nd year. (2 marks)

b) Assume that liquidity preference theory correctly predicts the term structure. Is the forward rate that you obtained in part a) an upward-biased forecast or a downward-biased forecast of the one-year interest rate for the 2^nd year? Briefly explain. (2 marks)

c) If you invest $1 at the end of the second year and hold this investment for 2 years, how much will you accumulate at the end of this investment? (2 marks)

d) Company ATA entered into a swap contract 1 year ago to pay annual payments at a fixed rate of 2% per year on a notional principal of $100m. The swap has a remaining life of 2 years with the next payment due in 1 year. Based on the available zero interest rates, what is the value of this swap for ATA in terms of bond prices? (3 marks)

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