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(a) The table below is incomplete. It includes some spot rates (annualized zero-coupon rates) and forward rates from the year before to that time period. Eg, F2,3 = forward rate from year two to year three. (In this table that number is 3.5%). Please complete the table by entering annualized rates into the remaining two cells. Show work for full credit.
Year
Spot Rate
Forward Rate (t-1,t)
1
2%
2
3
3%
3.5%
(b) You bought a three year 3% annual coupon paying bond at par. Using Modified Duration, estimate the price of the bond if rates were to rise 2%. Show your math. Is this bond more or less sensitive to movements in interest rates as compared to a zero-coupon three year bond like in part (a) - on this part, math is not necessary just explain?
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