The 6-month, 12-month, 18-month, and 24-month zero rates are 2.50%, 3.00%, 3.50%, and 4.00% with semi-annual compounding.

Question:

1: What are the equivalent rates with continuous compounding?

2: What is the forward rate for the six-month period beginning in 12 months (i.e., F12, 18)? If you use Eq 4.5 or 4.6, convert the forward rate into semi-annual compounding rate.

3: What is the value of an FRA that pays you the forward rate in Q2 and you pay a fixed rate of 4.25% (compounded semi-annually) on a principal of $1 million for the six-month period starting in 12 months?

Compounding
Compounding is the process in which an asset's earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. This growth, calculated using exponential functions, occurs because the investment will...