Determine the forward zero rates based on continuous compoun

Determine the forward zero rates (based on continuous compounding) for 6 to 9 months and 9 to 12 months using information provided in the table below. Annual zero rates based on semi-annual compounding (%)2 3.8-\' 5.0 6.6 8.0 Term (months)- 60 9 120

Solution

forward rate using continuous compounding for t=x months to t=y months

=(rate for y*y/12-rate for x*x/12)/(y/12-x/12)

Hence, rate for 6 to 9 months: =(6.6*9/12-5*6/12)/(9/12-6/12)=9.8%

rate for 9 to 12 months: =(8*12/12-6.6*9/12)/(12/12-9/12)=12.2%