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Consider the following three zero-coupon (discount) bonds:

Bond . Face Value . Time to Maturity .

Market Price

1 . $1000 . One year $924.64

2 . $1000 Two years . $841.53

3 . $1000 Three years $744.59

a) Calculate the one-, two-, and three-year spot rates. (3 marks)

b) Calculate the forward rate over the second year and the forward rate over the third year. (2 marks)

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