The 2-year forward rate starting in 3 years is calculated using the formula:

$3F2 = \left(\frac{R5}{R3}\right)^{\frac{3}{5-3}}$

where:

• $R3$ is the 3-year zero rate, which is 2.50%.
• $R5$ is the 5-year zero rate, which is 3.50%.

Plugging in the values:

$3F2 = \left(\frac{3.50}{2.50}\right)^{\frac{3}{2}}$

$3F2 = \left(\frac{14}{10}\right)^{\frac{3}{2}}$

$3F2 = \left(\frac{7}{5}\right)^3$

$3F2 = \left(\frac{343}{125}\right)$

$3F2 = 2.744$

Converting to a percentage:

$3F2 = 274.4\%$

However, this result does not match any of the options provided, indicating a mistake in the calculation. The correct calculation should be:

$3F2 = \left(\frac{(1 + R5)^5}{(1 + R3)^3}\right) - 1$

$3F2 = \left(\frac{(1 + 0.035)^5}{(1 + 0.025)^3}\right) - 1$

$3F2 = \left(\frac{(1.035)^5}{(1.025)^3}\right) - 1$

$3F2 = \left(\frac{1.035^5}{1.025^3}\right) - 1$

$3F2 ≈ 0.0500$

So the 2-year forward rate starting in 3 years is approximately 5.00%, which corresponds to option C.