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The 6-month 12-month 18-month, and 24-month zero rates are 4%, 4
The 6-month 12-month 18-month, and 24-month zero rates are 4%, 4.5%,4.75%, and 5% with semiannual compounding.
a) What are the 18-month zero rates and 24-month zero rates with continuous compounding?
b) What is the forward rate for the six-month period beginning in 18 months?
Expert Solution
1.
rate with continuous compounding=ln((1+rate with semiannual compounding/2)^2)
18 month zero rate=ln((1+4.75%/2)^2)=4.6945%
24 month zero rate=ln((1+5%/2)^2)=4.9385%
2.
forward rate=(24*rate for 24 months-18*rate for 18 months)/6=(24*4.9385%-18*4.6945%)/6=5.6705%c
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