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The price of a 1-year zero coupon bond is 98% of the face value, the...

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Finance

The price of a 1-year zero coupon bond is 98% of the face value, the prices of corresponding 2-year and 3-year zero coupon bonds are 95% and 92%, respectively.

Calculate the one and two year spot rates and the forward rate, f13, between years 1 and 3. You are offered an opportunity to borrow $1m in year 1 (one year from now). The loan requires annual coupon payments of 3% of $1m in years 2 and 3, and you must repay the capital of $1m in year 3. Should you accept this offer?

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