Answer the following:
i. Two bonds both have two years to maturity, face value of $100 and pay coupons annually. The coupon rate on bond A is 5.5% and that on bond B is 3.5%. Bond A sells for $103 and bond B's price is $99. What are the one and two year spot interest rates that can be inferred from this information?
Using your estimated one- and two-year spot rates, compute the one-year forward interest rate between the end of year 1 and the end of year 2. Give an economic interpretation of the information that is contained in this forward rate.