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The table below details the term structure of interest rates for Germany as at 01 March 2016. Maturity (T) r (1) r (2) r (3)

The table below details the term structure of interest rates for Germany as at 01 March 2016.

Maturity (T)

r(1)

r(2)

r(3)

r(4)

r(5)

r(6)

r(7)

r(8)

r(9)

r(10)

Spot Rate (%)

0.2

0.03

-0.08

-0.15

-0.2

-0.18

-0.11

-0.01

0.15

0.3

A. Using the data in the table above, calculate the forward rate for a 3-year loan beginning in 2-years. Show all working and formulas used.

B. Ratings Agencies play an important role in credit markets. Carefully establish what this role is and why it is important. Appraise and explain the factors that might undermine the usefulness of credit ratings.

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