The 1-year spot rate (on US T-bonds) is 9% p.a. The 2-year spot rate is 9.5% p.a. and the 3-year spot rate is 10% p.a.

(a)Calculate the implied one year ahead, 1-year forward rate, f₁₂ . Explain why a 1-year forward rate of 9.6% would not be expected to prevail in the market.

(b)Calculate the forward rates f₂₃ and f₁₃ . Is there any link between f₁₂ , f₂₃ and f₁₃ ?

(c)Very briefly, mention one practical use for spot rates and one practical use of forward rates.